Debt collectors are chasing down thousands of Americans who foreclosed on their homes years ago in an effort to squeeze more money out of them.
Although rarely used before the 2008 financial crisis, lenders have a tool called “deficiency judgment,” which allows them freeze bank accounts, seize assets and take wages in an effort to collect remaining debt following a foreclosure, reported Reuters.
A bank teller who broke up with her boyfriend and moved out of their shared bungalow was sued for $91,000 seven years later after her boyfriend defaulted on their mortgage. She had moved to another state, gotten a new job and saved $20,000. But if she loses the suit, the debt collector can take up to 25 percent of her wages, seize her car and freeze her bank account.
“For seven years you think you’re good to go, that you’ve put this behind you,” the teller told Reuters. “Then wham, you get slapped to the floor again.”
Collectors often target those who have managed to restore their credit and improve their financial position — often claiming they could have paid their mortgage but chose to default instead. Andrew Wilson, spokesman for federal lender Fannie Mae, told Reuters it focuses on these so-called “strategic defaulters” by analyzing a borrower’s credit history, assets, properties and credit lines.
From January 2010 to June 2012, Fannie Mae referred 293,134 cases where deficiency judgments might be applied to debt collectors — nearly half of all foreclosures it was involved in.
Depending on state law, a collector has a limited time to pursue a deficiency judgment, but one that’s secured, they can have years and even decades to collect on the remaining debt, reported Reuters.
Banks and collectors argue borrowers need to repay their debts, but consumer advocates argue the practice is unfair and cripples those who have just recovered from financial collapse. “This is monumentally unfair and damaging to the economy,” Ira Rheingold, the executive director of the National Association of Consumer Advocates, told Reuters. “It prevents people from moving forward with their lives.”
The 2008 financial crisis caused unprecedented loss for housing lenders, who faced more than $1 trillion in foreclosed loans.
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