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If they decided that you could afford and go to foreclosure, that still does not mean that they will be able to get a deficiency judgment. The main concern in a foreclosure is a "deficiency". This is where the property is sold for less than what is owed, at auction. In Washington,a deficiency judgment may be not obtained using the non-judicial foreclosure process (what most properties are sold at) when a property in foreclosure is sold at a public sale for less than the loan amount that the underlying mortgage or deed of trust secures. A deficiency judgment can be obtained in a judicial foreclosure sale, unless the property had been abandoned for the preceding six (6) months prior to the foreclosure judgment or decree that would preclude any deficiency.
Most of the time the foreclosure is a trustee sale (since that is much cheaper and easier for the banks to do). In that situation you would not have a deficiency, and it could very well be "strategic". But it's impossible to say from the beginning what route the bank will take. It will likely take the trustee, nonjudicial route (meaning you're not on the hook for any deficiency), but it doesn't have to.
Judicial foreclosures take a lot longer than non-judicial ones, and are more expensive. The only reason that they would likely take that route is if the deficiency was expected to be quite a bit. But if the deficiency was small, then they probably would go the non-judicial route, where they would not be able to seek a deficiency.
Even if they get a deficiency, that could be discharged in bankruptcy, should it even come to that in the first place.
Bankruptcy during the foreclosure process could take the underlying debt out of the equation, but they could still foreclose on the house, since that is the security interest for the loan. It would just mean that you could not be on the hook for any deficiency, etc... resulting from that sale (should they pursue the judicial route).
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So what you're saying Iis if the deed inlieu process decides I don't qualify could still let it go into foreclosure but would be liable for any deficit owed on the loan. How much lower than what is owed can they sell it for?
No, what I'm saying is that if they don't do the deed in lieu and foreclose, they could choose two options there: (1) nonjudicial, where they take it right to sale but can't pursue a deficiency, or (2) judicial, where they have to get the judge's signature, but they could pursue deficiency. Number 2 is longer and more expensive, and rarely do they choose that option.
As for selling it, it's public sale, so they sell it for what they can get.
It's a public auction.
Now they will typically set a reserve for the amount of the loan, in a non-judicial sale.
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