Section 502 Mortgage Deficiency Balance

Section 502 Mortgage Deficiency Balance

My house was foreclosed upon and now the USDA Rural Development says I owe them $50,000. What can I do?

My house is has been foreclosed and now the USDA Rural Development sent me a letter stating I owe them a little over $50,000. My lender is Chase Home Finance. I do not have the money to pay back this debt.

I am assuming that because you mentioned USDA Rural Development in your brief message that you have a Section 502 Guaranteed Rural Housing (GRH) loan. This is a 100% loan underwritten by the USDA Rural Housing Service. Section 502 loans are recourse loans, which means that if there is a foreclosure the creditor has the right to collect any deficiency balance from the debtor.


When a home is foreclosed upon by a mortgage lender, as happened in your case, the lender will usually sell the home at auction, which often brings significantly less money than the actual value of the home. The lender will apply the sale proceeds to its loan; if there is any money left over, it will then give that money to any secondary lien holders, such as home equity lenders or second mortgages.

If the sale proceeds are not sufficient to pay the entire balance owed on all secured loans, the consumer may be liable for the difference, which is called a "deficiency balance." Some lenders may decide to forgive any deficiency balance. The USDA Rural Housing Service has the right to pursue the borrower for the collection of the deficiency balance.

In some states, such as California, lenders are prohibited from collecting on deficiency balances resulting from loans used to purchase a primary residence. However, many other states allow lenders to collect on deficiencies to the full extent of the law. Because of the differences in state laws regarding deficiency balances, and because you may have a loan directly from a federal agency that may not be subject to your state's anti-deficiency statutes, I strongly encourage you to consult with an attorney in your area to determine if you are legally liable for the deficiency balance claimed by the USDA Rural Housing Service, and if you are liable, what steps you can take to stop these collection efforts. For more information about foreclosures, I invite you to visit the Foreclosure page.

Depending on your state laws regarding the collection of deficiency balances, your the USDA Rural Housing Service may be able to file a lawsuit against you for the collection of this debt. I cannot predict what action the creditor can take against you. You should keep in mind that even if the lender can sue you, it does not necessarily mean that it will decide to sue you.

Frequently creditors choose alternative collection tactics, such as hiring collection agencies, over litigating delinquent accounts; these decisions are based on many factors including the cost and practicality of filing suit, and if the creditor believes that filing suit will increase its chances of collecting the debt. For example, if the creditor thinks that you are likely unable to pay the debt, it may decide not to sue you simply to save money. However, if the creditor does sue you, it may be able to obtain a judgment against you, which could lead to wage garnishment, bank levies, and/or property liens, depending on your state laws. Again, I encourage you to consult with an attorney in your area to determine if the creditor can sue you, and if so, what the potential consequences for you could be.

If you find that you are legally obligated to pay the deficiency balance claimed by the USDA Rural Housing Service, you may want to contact it to discuss establishing a repayment plan to stop the collection activity and to prevent any further legal action against you. Hopefully the lender will be willing to work with you in resolving the debt.

However, if the creditor will not work with you on reasonable terms, you may want to consider filing for bankruptcy protection to prevent the creditor from pursuing legal action against you. For example, if you are able to file for Chapter 7 bankruptcy protection, you may be able to discharge this debt altogether, allowing you to free yourself from this burdensome obligation. If you are considering bankruptcy, you should definitely speak with an attorney to determine if bankruptcy is a viable option for you.

I understand how frustrating it must be for you to have gone through the painful foreclosure process only to now be faced with further collection actions by your home equity lender. Hopefully, you may have several options available to help you resolve this debt.

To read more about bankruptcy, I encourage you to visit the Bankruptcy page. To learn more about Section 502 loans, see the resource "USDA Rural Housing Service Mortgage Insurance" and the U.S. Department of Agriculture Rural Development Web site.

I hope this information helps you Find. Learn & Save.




SSarah Parks, Apr, 2012
I'm having the same problem. I did contact an attorney but the attorney doesn't know what to do. He said we could file bankruptcy but he's not sure if it'll help or not. I'm so lost. The government is taking our income taxes every year. Not to mention the difference of the sale and what we owed was only like $15,000 yet they are still saying we owe them $50,000 and they've already taken $13,000 in tax returns. We tried talking to them about the debt but the woman was rude and said we would get a letter. We have yet to receive a letter. I wish someone would tell us what we can do? No lawyer seems to have an answer for us.
BBill Admin, Apr, 2012
Talk to a lawyer who has experience in bankruptcy law. If the first bankruptcy lawyer says, "I don't know," then ask him or her for a referral to one who may. The bankruptcy lawyer community is small, and bankruptcy lawyers know others who specialize in certain areas of bankruptcy law. There is bound to be one in your state who has dealt with 502 deficiency balances before.