Can My Mortgage Company Garnish My Wages After Foreclosure?

Your mortgage lender can't garnish your wages during the foreclosure process. But if you've lost your home to the process and the foreclosure sale didn't cover the amount you owed the lender, the lender can potentially garnish your wages to collect the remaining balance after getting a "deficiency judgment."

However, some states have a law prohibiting lenders from getting a deficiency judgment and collecting the loan balance after a mortgage foreclosure. So, you won't face a wage garnishment if you live in one of those states.

What Is a Foreclosure?

If you default on your mortgage payments, a "foreclosure" is the legal process allowing the lender to sell your home to repay the loan.

How Does Foreclosure Work?

About half of the states require the mortgage company to sue the borrower in state court to foreclose. These states are often called "judicial foreclosure states." The lender files a lawsuit against the borrower, and if it wins, the judge awards a judgment for a specific dollar amount. The judge then gives the lender the right to sell the property. Usually, the lender buys the home at the auction using a credit bid when no one else offers to buy the property.

If your state doesn't require mortgage companies to sue in state court to foreclose, then you live in what's sometimes called a "nonjudicial foreclosure state." However, even in nonjudicial foreclosure states, judicial foreclosures are permitted. Nonjudicial foreclosure states allow the lender to take the property back using an out-of-court process.

Deficiency Judgments After Foreclosure Sales

If your property sells at a foreclosure sale for more than what you owe, you're off the hook and owe nothing on the debt. But sometimes, the property sells for much less than what you owe, resulting in a "deficiency."

A "deficiency" is the difference between your mortgage debt, including attorneys' fees and foreclosure costs, and the amount received from the foreclosure sale.

What You Owe (Minus) Sale Proceeds (Equals) Deficiency

For example, say you owe the mortgage lender $500,000 and your home sells at a foreclosure sale for $480,000. The deficiency is $20,000. ($500,000 - $480,000 = $20,000.)

What Is a Deficiency Judgment?

If the sale amount isn't enough to cover what you owe, the mortgage lender might be able to get a deficiency judgment. A court might enter a deficiency judgment as part of a judicial foreclosure or after a nonjudicial one. Then, the lender may try to collect the deficiency.

However, whether the lender can get a deficiency judgment depends on state law. In some states and under certain circumstances, the lender can't get a deficiency judgment.

State Law Sometimes Prohibits Deficiency Judgments

Again, state law sometimes prohibits deficiency judgments. For example, state law might not allow a mortgage lender to get a deficiency judgment after a nonjudicial foreclosure.

How the Lender Can Collect a Deficiency Judgment

If the lender can pursue collection of the remaining mortgage balance, it can usually do so by garnishing your wages, levying a bank account, or placing a lien on things you own.

What Is Wage Garnishment?

A "wage garnishment," sometimes called a "wage attachment," is an order requiring your employer to withhold a certain amount of money from your pay and send it directly to one of your creditors.

Garnishment After a Deficiency Judgment

After the lender gets a deficiency judgment, depending on the circumstances, it might be able to garnish your wages to collect on the balance.

How to Protect Your Wages From Garnishment After Foreclosure

If you're facing the possibility of having your wages garnished after a foreclosure, here are some options for avoiding garnishment of your pay. For example, you might be able to prevent the garnishment by claiming an exemption or filing for bankruptcy.

Work Out a Payment Agreement

Your lender might be willing to accept a lump sum payment or periodic payments to settle the debt. You can negotiate a settlement before or after the lender gets a deficiency judgment or even after the lender gets a wage garnishment order. If you're at the point where the lender is trying to garnish your wages, make sure you know how much the creditor can garnish. Don't offer to pay more than the lender would be able to take from your pay.

If the lender forgives some of the deficiency, you might have to pay tax on the forgiven amount, depending on the circumstances.

Use Exemptions

State laws allow debtors to protect some of their wages with exemptions. After you get a wage garnishment notice, see if your state's laws allow you to protect some of your pay and find out how much. You'll have to file a document in state court claiming any exemptions, you must usually act quickly. So, file the required form as soon as possible. You might have to go to a hearing and the judge will decide whether it is valid.

You also might be able to object if the wage garnishment was made in error or the creditor failed to follow the law or comply with legal procedures. A garnishment lawyer can help you identify any mistakes and object to the garnishment. An attorney can also help you determine if you're eligible for any exemptions and help you claim them.

Consider Filing for Bankruptcy

You can immediately halt a garnishment by filing for bankruptcy. Bankruptcy will eliminate a deficiency judgment and perhaps discharge other debts, too.

Talk to a Lawyer

Deficiency judgment laws vary from state to state and can be complicated. If you're facing a foreclosure, it's crucial to understand how the law works in your state. To find out if your mortgage lender is likely to get a deficiency judgment against you and how the foreclosure process works, talk to a foreclosure lawyer.

To learn more about using exemptions to prevent or reduce wage garnishments, talk to a debt relief lawyer.

If you want to learn about the pros and cons of filing for bankruptcy, talk to a bankruptcy lawyer.