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California's "anti-deficiency"
laws protects real estate debtors
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Dear Mr. Duman:
My friend has separated from his wife. He continues to live in the house they recently purchased, but, his wife no longer contributes to the house payment.
He cannot afford to make the payment himself. He cannot sell his home, because the sales price will not be sufficient to pay the costs of the sale and also pay off the lender.
What will happen if he defaults on his home loan?
J. S., San Mateo
If your friend fails to pay his monthly payment, he will ultimately be evicted by the lender; however, if the loan was used to purchase the property, California's "anti-deficiency" laws will protect him from liability to the lender in the event the proceeds from a foreclosure sale are not enough to fully pay the loan.
Set forth within the Civil Code of Procedure, Sections 580a through
580d, the "anti-deficiency" laws, prohibit secured lenders, under
certain circumstances, from pursuing the borrower for the unpaid balance
when the proceeds from a foreclosure sale do not fully pay the amount of
the borrower's secured debt. In other words, when the "anti-deficiency"
laws apply to certain protected borrowers, lenders will be barred,
generally, from pursuing the borrowers, personally, for any excess amount
of the secured debt left unpaid after a foreclosure sale (the "deficiency").
Section 580b specifically prohibits recovery of a deficiency from a
borrower, who incurred the loan in order to purchase real property
as a residence for the debtor, when the property contains one-to-four units
and the property was used to secure the purchase loan (Home buyers
who later refinance their home loans may risk losing their "anti-deficiency"
protection).
Section 580b also bars a deficiency as to sellers, who sold the secured
property to the borrower, and who "carried back" a loan as part of the
purchase price, as "seller financing".
Code of Civil Procedure Section 580d further prohibits deficiency judgments
from otherwise unprotected borrowers, when a lender has foreclosed upon
the secured property by a private, "power-of-sale" foreclosure proceeding,
pursuant to the terms of the deed of trust. If the lender wishes
to obtain a deficiency judgment against an unprotected borrower for the
unpaid loan balance, Section 580d requires the lender to initiate a judicial
foreclosure as set forth by statute.
It is important to note that an otherwise protected borrower might
still be subject to further claims by the lender after foreclosure, such
as when the borrower induced the lender into issuing the loan by use of
fraud, or where the borrower has committed "bad faith" waste as to the
secured property (i.e reckless, intentional, or malicious failure to physically
maintain the property).
Although a protected borrower may escape liability to a lender by virtue of the "anti-deficiency" legislation, such a borrower must consider the effect on his/her credit reputation and the ability to subsequently borrow money, because a foreclosure will certainly negatively impact "credit."
A borrower, who has good "credit" and whose property's value has dropped
and thereby prevents a sale, may wish to consider negotiating a "short
sale" with the lender, whereby the lender agrees to accept less than the
loan balance as full payment. Although, a "short sale" also negatively
affects "credit", it is not as bad as a foreclosure.
Borrowers facing "foreclosure" or "short sales" must be certain to
consult their tax advisor as to possible negative tax consequences in allowing
a foreclosure or participating in a "short sale."
The laws governing foreclosure, short sales and the tax consequences related thereto cannot be fully addressed in this limited forum. As a result, we strongly urge our readers to consult with their lawyers and tax advisors regarding this subject.
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