A strategic foreclosure is a process in which you have the money to pay your mortgage, but you instead decide to walk away from the house and the lender forecloses on the home. While this could get you out of a bad mortgage, it can also lead to an unexpected lawsuit.
Creating a Deficiency
When you walk away from your mortgage, the lender will foreclose on the house and take possession of it. At that point, the lender will attempt to sell the house through an auction. If the auction does not yield a buyer, the lender will sell the property through normal means. In some cases, the lender will sell the house for less than what is owed on the mortgage balance. When this happens, it creates a deficiency.
Recourse Loans
When you take out a mortgage, it falls into one of two categories: recourse or nonrecourse. If a loan is a nonrecourse loan, the lender cannot take any further action against you after a foreclosure. The lender can only take the house and nothing else. If the loan is considered a recourse loan, the lender can take further action against you to try to collect of the amount that you owe.
Lawsuit
If you live in a state that allows recourse loans and your mortgage happens to fall into this category, the lender could file a lawsuit against you after a strategic default. If you walk away from your mortgage and you have a recourse loan, the lender can file a lawsuit against you in civil court. The lender can sue you for the entire amount of the deficiency balance on your loan. Typically, the court will award the lender with a judgment that it can use to collect the money you owe.
Enforcing the Judgment
After the lender has a judgment, it can use this judgment to collect the money you owe in several ways. For example, one method that the lender can use to get the money is to garnish your wages. When your wages are garnished, a portion of the money that you earn comes directly out of your paycheck and goes to the lender. Another option is to levy your property. The lender could use the judgment to take money directly out of your bank account or seize your personal possessions.
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