Just when I thought the mortgage crisis had been covered from all angles, Brian J. O’Connor, finance editor at the Detroit News, found that the heartache may not be over for some people who’ve lost their homes to foreclosure. He writes:
“Until a few years ago, when someone lost a home to foreclosure in Michigan, the owner walked away embarrassed and financially battered, but owing nothing more on the property
Now, because of dropping property values, mortgage lenders are engineering foreclosures so they can pursue a borrower for the unpaid balance of a home loan for years to come. With added fees and interest, this phantom debt — called a ‘mortgage deficiency’ — could swell to become more than the homeowner paid for the property.”
That caught my attention – and Brian’s — when a bankruptcy lawyer told him about people being confronted with this debt by bill collectors.
Today’s Tip: Know bankruptcy and foreclosure laws and how they intersect, Brian says.
For example, in Michigan, lenders only have to file legal notices and auction the properties in foreclosure – there are no hearings, Brian says. Because of falling values, lenders usually buy the properties at auction for less than what the borrowers owed. The difference, called a deficiency, becomes an asset on the books that the banks sell to collection firms who can wait until the homeowners’ financial pictures improve to go after the debt.
“It’s a new cottage industry of debt collection,” Brian says.
Brian’s story has an informative sidebar on some states’ laws. To get a better sense of what’s happening in your area, talk with bankruptcy lawyers and trustees, as well as consumer-debt attorneys, he says.
“Don’t be afraid to ask an expert to walk you through it step by step,” Brian says. “When you hear something that doesn’t add up, be like Columbo: Ask ‘what do you mean?’”