Who pays for the "deficiency judgment" when your home goes into foreclosure during your divorce?

Well, if the house is a marital asset, then the debt is probably going to be classified as a marital debt. A deficiency judgment is a marital debt if it derives from the short sale of a marital residence prior to the judgment of divorce. After the judgment of divorce is signed, more than likely one party will own the home. That person probably has title to the home, and the mortgage was refinanced to reflect one spouse’s name. In a case like that, if a short sale ensues after the judgment and title has passed, only one spouse will be responsible to pay off the deficiency judgment.
But if title has not passed and both spouses are on the title, then if the house goes into foreclosure and there is no judgment of divorce that orders one spouse to take responsibility for the debt, then both spouses are responsible to pay off the deficiency.
What is a deficiency judgment? Well if, say, you owe the bank $100,000 on a home and you are unable to pay the mortgage for some reason, the bank may give you permission to have a short sale. That means you can sell the house for less than $100,000. Let’s say you sold for $65,000. Then there is a shortfall of $35,000. That $35,000 is a deficiency. You still owe that to the bank. So what happens is that the bank may let it sit there and do nothing. But five years later, they go to court and get a judgment for the $35,000. All of a sudden, this deficiency is now a deficiency judgment. Once they have a judgment, in several states, including New York, they will have about 20 years to collect on the judgment.
Of course, they have both your social security numbers from the days when you were married and owned the house with your spouse. So collecting on the judgment will be easy. They can garnish your wages, put liens on anything you own at that point — so long as you were on the title and deed to the property at the time it went into foreclosure, and so long as the judgment of divorce does not absolve you from responsibility for the debt.
To protect yourself from deficiency judgment, it is wise to negotiate with your lender at the time of the short sale. You need the lender to agree to forgive the deficiency. There are tax consequences to deficiencies as well. So you really need to negotiate with the lender to forgive the deficiency, or you need to get your spouse to take the rap for the whole thing in the divorce judgment. And that is probably unlikely to happen in most circumstances.
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