If you've lost your home to foreclosure and the foreclosure sale did not cover the amount you owed to the mortgage lender, can the mortgage lender garnish your wages to collect the remaining balance on your loan? The answer depends on several factors, including whether you live in judicial or nonjudicial foreclosure state, whether home loans in your state are recourse or non-recourse loans, and whether the loan was a first mortgage or some other type of home loan.
The Right to Garnish Wages
In most cases, a creditor must get a judgment against you before it may garnish your wages. A few types of creditors can garnish your wages without first obtaining a judgment, but mortgage companies and private lenders do not fall into this category. That means your mortgage lender will have to sue you and get a money judgment before it can garnish your wages.
(To learn more about wage garnishment, see our Wage Garnishment and Attachment area.)
The Foreclosure Process
About half of the states require your first mortgage company to sue you in state court to take the property back if you are not willing to give it back voluntarily. These states are often called judicial foreclosure states. The bank files a lawsuit against you and, if it wins, the judge awards it a judgment for a specific dollar amount. The judge then gives the bank the right to sell the property (often back to the bank itself). (Learn more about foreclosure and the foreclosure process.)
If your state doesn’t require your first mortgage company to sue in state court to take the property back, then you live in a nonjudicial foreclosure state. Nonjudicial foreclosure states allow the bank to take the property back based on an additional document you signed when you bought the house called a deed of trust. (To learn more about judicial and nonjudicial foreclosures, and to find out which process your state uses, see How Foreclosure Works in Your State.)
The Property Sale: When the Sale Amount Is Not Enough to Cover What You Owe
The bank then sells the property. If the bank sells the property for more than what you owe, you are off the hook and owe nothing on the debt. Today’s real estate market makes this possibility extremely unlikely. More commonly, the bank sells the property for much less than what you owe.
If the sale amount is not enough to cover what you owe, the mortgage lender may be able to try collect the remaining balance. Whether it can do so depends on several factors:
- whether the foreclosure was a nonjudicial foreclosure
- whether you live in a recourse or non-recourse state, and
- whether the mortgage was a second mortgage or home equity line of credit.
These are explained below. If the lender can pursue collection of the remaining balance, it can usually do so by garnishing your wages.
Wage Garnishment in Nonjudicial Foreclosure States
Whether your mortgage company can garnish your wages in a nonjudicial foreclosure state depends on several factors. State law typically prevents your first mortgage company from collecting on the balance owed unless one of the following exceptions apply.
Purchase Money Mortgage or Refinance
If the debt you owe results from money you initially borrowed to purchase the house, the law refers to this as a purchase money mortgage. Most states do not allow a purchase money mortgage company to try to collect on any outstanding balance after the sale of the property. This means the mortgage company must eat the loss and your wages are not in jeopardy of being garnished.
However, if you refinance your house, some states will allow the mortgage company an opportunity to collect on the outstanding balance. Requirements concerning time deadlines exist to ensure the mortgage company does not delay or waste time in asserting its rights. If you are about to be garnished, you should check your state’s laws to make sure your mortgage company complied with these deadlines.
Second and Third Mortgages and Home Equity Lines of Credit (HELOCs)
Most state laws allow the holders of your second and third mortgage companies to collect on the balance. Home equity lines of credit also act as a lien on your property so those creditors may also garnish your wages to collect on the balance.
In today’s real estate market, these types of mortgage holders are typically unsecured because the house does not have enough value over and above the first mortgage. This means these types of creditors stand to get nothing on the debt owed to them unless the state’s laws afford them some form of collection.
Judicial Foreclosure in a Nonjudicial Foreclosure State
Even though your mortgage company has a right to foreclose on the property without the involvement of the court, it may nonetheless elect to sue you in state court to foreclose on the property. If the mortgage company completes the foreclosure in this manner, your state’s laws typically allow it a limited opportunity to garnish your wages to collect on the balance.
Wage Garnishment in Recourse and Non-recourse States
If the mortgage company must use the judicial foreclosure process, whether your the mortgage company for your first mortgage can garnish your wages after the sale of your house depends on whether you live in a state that follows a recourse or non-recourse theory of recovery.
If you live in a recourse state, the first mortgage company has the right to collect against you if the sale of your home is not enough to cover your debt. Remedies might include seizing property, placing additional liens on property you already possess, or garnishing your wages. Each state’s laws provide different remedies for how and when a mortgage company may pursue collection after it completes the foreclosure sale.
If you live in a non-recourse state, the mortgage company on your first mortgage may not go after you for the balance owed on the mortgage after the sale of the property. There are some exceptions this rule. For example, most states allow lenders on home equity lines of credit or second mortgages to continue collection efforts after your home is sold in foreclosure. If this is your situation, consider consulting with a foreclosure attorney to find out the law in your state.
Preventing Wage Garnishment After Foreclosure
If you face the possibility of wage garnishment after a foreclosure sale (either because you live in a recourse state, or you had a home equity line of credit or junior mortgage), you may be able to prevent the garnishment by:
- claiming an exemption, or
- filing for bankruptcy.