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The long-term risk of foreclosure: Florida deficiency judgments

With Florida's real estate market still falling and the foreclosure rate continuing to climb, many have speculated about the wisdom of what they call "strategic default." The term refers to people who could afford to keep making their mortgage payments but owe more than the home is worth. If these individuals default on their payments and accept foreclosure, it is referred to as strategic default.

For some individuals, this option may seem tempting. They've seen their homes values tumble. They owe hundreds of thousands to the bank. And they feel trapped in a home that is worth much less than they owe. But choosing to "let" the bank foreclose may be a riskier option than may realize. This is because of Florida's deficiency judgment laws.

When a lender is not able to sell a foreclosed property for the amount owed on it, that lender can sue the former homeowner for the difference. Say a person purchased a home worth $500,000 during the height of the real estate boom. Let's assume they still owed $400,000 on the property, and the bank foreclosed.

Now let's assume that the lender was only able to sell the home for $250,000 after the foreclosure. The lender has up to five years to file a lawsuit against the former homeowner to make up the $150,000 difference between the amount the homeowner owed and the amount the bank was able to obtain for the property. If the bank is successful in that lawsuit, they would get a "deficiency judgment."

For the hundreds of thousands of homeowners who have been foreclosed on in the last couple of years, deficiency judgments could pose a real threat. Especially for those who strategically default. If lenders believe they could recover some or all of the loss they took on the foreclosure, they are likely to file for deficiency judgment.

Now, of course most of the people who lost their homes to foreclosure do not have the money to pay the deficiency judgment. But Florida's laws allow the lender to collect on that judgment for up to 20 years.

Hopefully, the people who were hit by the economic recession will have recovered in the next two decades. Unfortunately, deficiency judgments could eat away a significant portion of any money they are able to save during that time.

Source: Palm Beach Post, "Foreclosures' hidden risk: Debt that haunts for two decades," Kimberly Miller and Christine Stapleton, updated 5 April 2011

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