Release of Mortgage vs. Release of Liability
Have you or someone you know received a deficiency judgment? If you have, and you find yourself in quite the predicament, this is the place to be. A deficiency judgment is a collection of funds sent to a person who signed a promissory note when taking out a mortgage. This may sound complicated but a promissory note is simply a promise to repay the amount borrowed and the mortgage explains what happens when the borrower cannot or does not pay. Some consequences include the loss of the home in a foreclosure or the need to sell the home in a short sale before the foreclosure was finalized. This notice is sent after the home has been released and that is why people are usually not prepared.
When a person buys a home they typically do not have the money upfront. Instead, the average American turns to a bank and takes out a massive loan in their name. This loan is used to purchase the home and the individual, or individuals, are then responsible for repaying the cost of the home with mounting interests. According to a study on interest rates and credit rationing in the U.S., the average interest rate in America is about four percent. This, in turn, means that people are paying monthly for the money they borrow plus an additional four percent every month. Over time, this mounting debt can prove to be a burden.
Although there are people that live entire lifetimes without a single injury, life can change in a split second. A physical injury can force a person to be out of a job for two months and the loss of income can cause them to fall behind on payments. Under the terms of a mortgage, the lender can force the borrower to sell or foreclose their home to repay the loan. A promissory note is tied to the title of the home and the mortgage validates the agreement to use the home as collateral in case the loan is not repaid.
Before the home is foreclosed one of two things can happen:
1. The homeowner can find a buyer and sell the home in a short sale before the foreclosure is finalized.
2. The individual can pay the amount owed and recover the control of the asset.
Either way, the homeowner is responsible for repaying the amount agreed upon under the promissory note and the mortgage. If the home is sold in foreclosure or a short sale, the homeowner is released from the mortgage. However, the purchase price is typically less than the amount of the loan. When the sale does not cover the amount agreed upon in the promissory note, that is when the deficiency judgment is sent.
A release of mortgage releases the loan from the property but it does not release a borrower from the loan. In order for the borrower to be released from the loan, they would have to have been given a release of liability. A release of liability releases the borrower from having to pay the difference between the loan and the purchase price in the case that home was sold for a lesser value than the loan. The release of liability means the borrower is not personally liable to continue making payments until the entire loan is paid in full.
Every state is different. For example, there are states like California and Washington that do not allow for deficiency judgments and then there is Connecticut who allows them under strict foreclosures. No matter where you live, it is always best to stay informed and know what agreements are being signed. A release of mortgage is not a release of liability. Be careful about what you sign.
If you need help or are looking for counsel about what to do after a deficiency notice, contact bankruptcy lawyers in Arlington, TX for a consultation.
Thanks to Brandy Austin Law Firm, PLLC for their insight into bankruptcy law and mortgages.