Foreclosure fallout

Thousands of Minnesotans have lost their homes to foreclosure in recent years. For many it is a gut-wrenching experience filled with fruitless attempts to get caught up on payments or negotiate a short sale. One would hope that the pain ends with the handing over of the keys to the bank. Unfortunately, this is not always the case. Minnesota permits what is called Non-Judicial Foreclosure or Foreclosure by Advertisement.  This means that instead of going through a formal legal proceeding to foreclose (Foreclosure by Action), the mortgage holder merely needs to publish a conforming notice in a local newspaper for six weeks prior to the foreclosure sale. This method is less costly for the mortgage holder than Foreclosure by Action, so it is quite common.

One benefit for consumers of Foreclosure by Action is that foreclosing mortgaging holders cannot sue them for a deficiency judgment (a deficiency arises when the sale price of the property is less than what is owed on the mortgage).  This means that they will ONLY get the proceeds from the sale of the foreclosed property. This can be good news for the person losing their house, BUT, and this is a very significant BUT... most home buyers in recent years financed their homes with a first and second mortgage.

If the holder of the first mortgage forecloses and the sale price of the property isn't enough to pay off both the first and second mortgage, the holder of the second mortgage can sue the homeowner for the deficiency. That was a pretty convoluted sentence, so let me use an example:

Mortgage 1: $160,000

Mortgage 2: $40,000

Property sells at Sheriff's Sale for $150,000.

Even though the holder of Mortgage 1 lost $10,000, it cannot go after the homeowner for the deficiency

The holder of Mortgage 2 can still go after the homeowner for the full $40,000

This situation adds insult to injury for people who have just lost their home.  We frequently have clients come and ask what they can do about it. Of course every individual's situation is different, but one possibility to consider is Chapter 7 bankruptcy. Since the second mortgage is no longer secured by the home, it is simply another unsecured debt, which can be discharged in bankruptcy.