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Terry L.
Terry L., Attorney
Category: Bankruptcy Law
Satisfied Customers: 2659
Experience:  Better Business Bureau. 18yrs bankruptcy experience. Chicago Bar Assoc. American Bankruptcy Institute member.
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This is both a real estate issue and a bankruptcy issue. I

Customer Question

This is both a real estate issue and a bankruptcy issue.

I bought my San Diego house in Sept 2009. I currently owe $479,000, FHA loan, $3395 payment, primary residence. According to Zillow, the house is worth $495,000 right now. I took the $8000 first-time home buyers tax credit and got it in the bank. I have cash assets right now of $16,000 with another $38,000 in stocks (underwater from $62,000). I own two cars and a houseful of furniture. I am currently working making $80/hour (but living in the Bay area so I have huge expenses and the high $ rate is sopped up by extra rent and travel back home).

I understand that the FHA loan is a recourse loan even though it is purchase money and was done in California. My question is: if I walk away from the house and the Feds come after me for a deficiency judgment, can bankruptcy erase that judgment? Can I even file bankruptcy with the above asset profile? Many thanks.
Submitted: 7 years ago.
Category: Bankruptcy Law
Expert:  cfortunato replied 7 years ago.
Hi JACustomer,
Why do you think your FHA loan is a recourse loan?
Customer: replied 7 years ago.
24 CFR 203.369



"FHA/VA Loans.
Nowadays these federally insured or guaranteed loans incorporate enforceable provisions allowing the federal government (HUD) to sue to collect whatever deficiency that might result upon the foreclosure of these loans, regardless of the anti-deficiency statutes of some states such as California's, and regardless of the foreclosure procedure (judicial or non-judicial) that was employed by the originating lender."

Now, they may not decide to go after me, but what I have read in other places is that they may if I walk away from the house. Also, since I can't use California's "no recourse" law to stave off the lender from pursuing me, I may get both barrels. My question is what to do if this happens.
Expert:  cfortunato replied 7 years ago.
Thanks for the information! That statute does not authorize deficiency judgments where they are prohibited by state law. However, if the lender does get a deficiency judgment, that judgment can be used to garnish wages, bank accounts, stocks, and place liens on non-exempt property, including cars with more than $2500 in equity (equity = Kelly Blue Book trade-in value minus balance on car loan).
If filing a bankruptcy, you would be able to keep $21,825 cash (including bank accounts) or stocks, and keep a car with up to $3300 equity.

Edited by Christina Fortunato, Esq. on 6/6/2010 at 2:44 AM EST
Customer: replied 7 years ago.
"That statute does not authorize deficiency judgments where they are prohibited by state law."

Could you please clarify this? I thought that federal law superceded state law. Are you saying that I am immune from a recourse deficiency judgment due to California's law (all purchase money, etc), even though this is a federal statute? What about what I quoted from
Expert:  cfortunato replied 7 years ago.
That statute states, "the Secretary may require the mortgagee diligently to pursue a deficiency judgment in connection with any foreclosure." (ital. added). It would be useless for the Secretary to require a mortgagee of a purchase-money mortgage in California to pursue a deficiency judgment, because it cannot be done.
The statement from that website says that HUD can pursue a deficiency judgment. Is HUD your lender?