Personal Bankruptcy

Chapter 7 Bankruptcy Blog By Olenicoff & Zinser, PC

Lenders Suing Borrowers for Deficiencies in California

I am finding that more and more lenders are suing borrowers for deficiencies on their second mortgages in California. Citimortgage was the first and most aggressive, it appears that Wells Fargo and National City have joined the bandwagon.

A deficiency is created when there is a short sale or a foreclosure and the lender is owed more than the lender receives from the sale of the home. Then the borrower is left with a deficiency on a loan but the borrower no longer has the home. In most foreclosures in California, the first lender cannot go after the borrower but oftentimes the second lender can. I see more and more people with lawsuits against them from lenders.

Bankruptcy is an alternative to lawsuits from lenders. In bankruptcy, you are released from personal liability on your mortgage. Your loan is still secured by a deed of trust on your home but after your discharge, you are no longer personally liable. If you are considering a short sale, a bankruptcy can be filed at any time during the short sale process and you will be able to continue with the short sale. You just need a good attorney to help you and your Realtor navigate those waters.

One final note of caution, to qualify for a Chapter 7 bankruptcy (a complete forgiveness of your debts), you must pass the means test. Most of my Orange County clients need to have a mortgage to help them qualify for the means test. So be careful, once you no longer own your home it may be close to impossible to file for Chapter 7 bankruptcy.

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