Q: I’m in trouble with my house. I’m heading to foreclosure, unless I can complete short sale quickly. Once we’re done with the property (either due to foreclosure or in a short sale), can the mortgage company require me to use my retirement savings towards reducing the amount of their loss? I have about $200,000 in an IRA but that is my only retirement money.
A: In some states, lenders can’t go after their former borrowers if they took out a loan for the purchase of their primary residence and they used that home as their primary residence. In some cases, lenders are limited in their ability to go after borrowers if they have secured the loan on their home using a trust deed rather than a mortgage.
In other states, lenders have certain constraints in obtaining a judgment against their borrowers for deficiency judgments.
The real question for lenders is whether their borrower has the ability and means to repay the amount of the deficiency or shortage from the sale of the home. If the lender believes the borrower has that ability and the amount is great enough, the lender may decide to go after the borrower.
You asked whether the lender can force you to liquidate your IRA savings to pay the lender off. Generally, money invested in retirement accounts is safe from creditors and your bank could not force you to sell off your IRA to pay them off. But a bank creditor could sue you for the amount you have failed to pay the bank, if the bank can get the deficiency judgment against you.
So while the bank can’t force the sale of your IRA, the bank can try to get money from you just as any other creditor might. The bank can try to find other bank accounts you might have and might even be able to garnish your wages. When a bank garnishes your wages, the bank obtains a court order forcing your employer to pay the bank a part of your wages from each of your paychecks.
While most lenders these days are focused on trying to stabilize their real estate portfolios, work with borrowers to limit the banks’ losses and avoid spending good money chasing bad debts, it’s also possible that the bank could try to sell off the deficiency debt that a short seller owes the bank to a debt collector only to have that debt collector go after you now, or in the future.
So while your retirement savings might be safe, if a bank insists on having you pay a deficiency on the sale of your home through a short sale, and the bank has the legal right to pursue you, the bank can and may attempt to continue to collect that debt against you but can’t force the sale of your retirement funds and assets.
Lastly, the bank and other creditors or collection companies risks losing their right to go after you for money you might have owed the bank from the short sale if you later file for bankruptcy.
While we have seen an increase in bankruptcy filings during the recession, we could see a steep increase if banks decide to go after the thousands of borrowers that have gone through a short sale and those borrowers decide to file for bankruptcy protection.
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