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Facing foreclosure? You may live in a recourse state

Defaulting homeowners generally understand the concept of foreclosure, but many may not understand other consequences that could go in tandem with foreclosures, like default judgments.

Drastic changes have occurred within the U.S. housing market over the past decade. The real estate crisis that began to unfold in 2008 caused widespread foreclosures all across the country. Many were forced out of their homes. Although the real estate landscape has improved since then, the housing market today is far from superior. Foreclosures are still occurring everywhere, including Tennessee.

Homeowners at risk of losing their homes generally understand the concept of foreclosure-their property will be repossessed and they will have to vacate as a result of their default.

But many may not understand other consequences that could go in tandem with foreclosures – such as lender recourse.

Understanding recourse when it comes to foreclosures

Essentially, when a foreclosure occurs, the law allows a lender, bank, or other mortgagor to take back possession and title of a property from a mortgage borrower who has defaulted. The property is typically resold to recoup the balance on the defaulted loan.

But, in many cases, the lender may not recover the entire amount of the mortgage balance after the resale. This can occur if the mortgage on the home is more than what the home is worth in the present market.

And, depending on the jurisdiction, some lenders can go after the defaulting homeowner for the deficiency. This is referred to as lender recourse. There are states that allow for lender recourse in foreclosure instances and there are some states that known, referred to as nonrecourse states. Unfortunately for borrowers, Tennessee is a recourse state.

But what does this mean exactly?

Lender recourse in Tennessee

An illustration may help explain the concept.

Let’s say, for example, that a Tennessee homeowner has a mortgage for $200,000. The homeowner defaults and the lender forecloses on the property. Given the current market rates, the home is thereafter sold for $150,000-$50,000 less than the original mortgage.

Since Tennessee is a recourse state, the law allows the mortgage lender to seek a judgment for the $50,000 against the defaulting homeowner for the deficiency on the original mortgage note.

Bankruptcy protection

Fortunately, there are options under the law to help individuals facing foreclosure and potential deficiency judgments. Bankruptcy is one such avenue.

Chapter 13 bankruptcy, for instance, allows many homeowners to stay in their homes and circumvent the foreclosure process. Many filing a Chapter 13 can restructure their mortgage debt, and in some instance, refinance the mortgage if it’s underwater.

To find out more about Chapter 13 bankruptcy and how it can help you avoid foreclosure, contacting a bankruptcy attorney is the first step. A lawyer can assess your individual circumstance and offer legal options that will keep you from losing your home.

Keywords: foreclosure, deficiency judgments, bankruptcy, Chapter 13