Avoid the mortgage debt scam

Recently I was reading about people around the nation who take out deeds in lieu of foreclosure and wind up getting called about owing debts on their mortgages years after they thought those loans were well in the past.

Typically, a deed in lieu of foreclosure will effectively get rid of mortgage debt. Such a deed, of course, gives the lender the title to the house in exchange for its promise not to sue the borrower.

There are, however, times when one might have that old mortgage debt come back to haunt them. For one thing, there is such a thing as a deficiency judgment. While most people don’t have to worry about one, there is the chance that it could rear its ugly head in the future.

For example, let’s say Ted owes $200,000 on his house. He can no longer make his mortgage payments so he offers a deed in lieu of foreclosure to the bank so they won’t sue him. The bank sells the home for $180,000. That means there is a deficiency amount of $20,000 on the mortgage and Ted may be liable for that. While that problem usually doesn’t surface, anyone taking out a deed in lieu of foreclosure will make sure that the bank waives its rights to pursue a deficiency judgment.

Another scenario is when there was a secondary mortgage from another lender. Keep in mind that a deed in lieu of foreclosure entered into by one lender will not waive any debt owed to another one.

James Wyre, a bankruptcy attorney in Conway, said there is some good news for people who do have deficiency judgments after a deed in lieu of foreclosure or an actual foreclosure. Those debts are not secured by anything and, as such, can be dealt with easily in bankruptcy court. In other words, Ted might owe $20,000 but he can extinguish that debt in bankruptcy court pretty easily.

Meanwhile, Wyre said there is another reason that people who file deed in lieu of foreclosure should be on guard – there are some fly-by-night collection companies that will locate people who have entered into those, purchase rights to sue for pennies on the dollar for those and then try to badger people into sending them money.

He said those companies are often bluffing. They don’t have the documentation to pursue a lawsuit, so they try to scare people into sending cash.

The defense against those companies? Ask for proof of the debt. If they can’t provide an accounting and a paper trail establishing how the debt was incurred, the chances are good you are dealing with a company that cannot maintain an action against you.

Legitimate companies will always be able to show how a debt was incurred. Then again, the chances of a legitimate collection agency calling and trying to collect a mortgage debt that was dealt with in a deed of lieu of foreclosure are very slim.

If you are in doubt, consult with your friendly, neighborhood attorney and have him or her investigate the case on your behalf.