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foreclosure deficiency laws

Foreclosure deficiency laws


If you are facing foreclosure, or have lost your home through foreclosure, you might still owe your mortgage lender money after the sale. This happens if the foreclosure sale price is less than the amount remaining on your mortgage - it's called a "deficiency." Whether your lender can go to court and get a judgment for the deficiency, and then collect it, depends on state law. Below you can find the law on deficiencies in each of the 50 states.

Deficiencies play a role in short sales too. In most states, you are on the hook for a deficiency after a short sale. But there are ways you can avoid or handle a deficiency.

And for both foreclosures and short sales, you might owe the IRS some money.

What is a deficiency Judgement after foreclosure?

A deficiency judgment is a legal order to pay off a loan balance after foreclosure or repossession. When a lender takes your property and sells it, the sales proceeds to pay off your debt and any additional fees related to collections.

What Is a Deficiency Judgment?

If a person is unable to keep up with mortgage payments, it may result in the property being foreclosed and subject to sale. What usually happens is that the proceeds of the foreclosure sale will be forwarded to the mortgage company, in order to make up for late or missing mortgage payments. 

If the profits from the foreclosure sale does not satisfy the mortgage debt, the lending company is sometimes allowed to file a lawsuit requiring the borrower to pay the difference between the debt and the foreclosure sale proceeds. This is known as a deficiency suit or deficiency judgment. For example, if the foreclosure sale yielded $9,000, but the mortgage company is owed $10,000, they can file for a deficiency judgment to compel the borrower to pay the remaining $1,000. 

What Are Anti-Deficiency Laws?

Anti-deficiency laws prohibit mortgage companies or other lending institutions from filing deficiency lawsuits. This effectively allows a borrower to walk away from a foreclosure sale without owing the lender any further amounts, even if the foreclosure sale did not fully satisfy outstanding debts.

If an anti-deficiency law is in effect, the lender can really only recover the property itself as well as the proceeds from subsequent sales. They may often end up with losses, because under such laws they cannot force the borrower to make up any differences. 

Even if a court permits a lender to pursue a deficiency judgment, anti-deficiency laws typically create a limit on how much lenders can collect from borrowers. The typical limit on deficiency collection is fair market value; the lender cannot collect more than the difference between the amount of debt and the fair market value. However, many states will differ on what "fair market" means, given the state of the economy, housing market, and value of property in each state.

Which States Have Anti-Deficiency Laws?

The following states have anti-deficiency laws: Alaska, Arizona, California, Connecticut, Hawaii, Iowa, Minnesota, Montana, Nevada, New Mexico, North Carolina, North Dakota, Oregon, Washington, and Wisconsin.

In Hawaii, the foreclosure must be executed after July 1st, 1990 in order for anti-deficiency protection to apply.

In Nevada, anti-deficiency protection only applies if certain conditions apply. One of those conditions is that the loan must originate on or after October 1st, 2009.

In Iowa, anti-deficiency protection is limited to cases where the lender chooses foreclosure without right of redemption and the borrower does not demand that the foreclosure be delayed.

When Are Anti-Deficiency Laws Inapplicable?

Not all states have anti-deficiency laws in place. In such states, borrowers are not fully protected against deficiency suits, and may be compelled to pay mortgage deficiencies.

Even if a state has anti-deficiency laws in place, they may not always be applicable in every situation. For example, anti-deficiency laws generally do not apply if:

  • The agreement in question is for a second mortgage or a home equity line
  • The property is not being used as the primary residence of the borrower
  • The loan was not for the purpose of purchasing the house or dwelling
  • The property was purchased through a short sale
  • The foreclosure sale was ordered by a court of law ("judicial sale")
  • The borrower obtained the property through fraud

Note that the laws of each state are. For example, California gives borrowers anti-deficiency protection even if the borrower is on their fourth mortgage. Other states will not be as forgiving.

There may be factors in each individual claim that may affect the applicability of anti-deficiency laws. You may wish to consult with a real estate attorney if you have any questions about the rules in your area.

What Is the One-Action Rule?

Some states will not permit lenders to collect deficiency judgments unless the lender follows a certain legal process. For example, in California, lenders cannot pursue a deficiency judgment unless they use judicial foreclosure. California forces lenders to choose between a quick foreclosure in non-judicial foreclosure or the possibility of collecting a deficiency judgment through judicial foreclosure.

What If the Borrower Waived the Right to Anti-Deficiency Protection?

Borrowers generally cannot waive their right to use anti-deficiency laws if the borrower was the primary borrower of the loan. Anti-deficiency laws are a matter of public policy and thus private parties cannot waive anti-deficiency laws through contract or mutual agreement. If a state permits parties to waive anti-deficiency protection, there must be an explicit statute for doing so.

Some states permit borrowers to waive anti-deficiency protections if the borrower is a guarantor of the loan. A guarantor is someone who agrees to pay the debt if the primary borrower, or borrower who promised to pay the loan originally, defaults.

Do I Need a Lawyer for Issues Regarding Anti-Deficiency Laws?

Real estate matters involving foreclosure, mortgages, and deficiency judgments can often be confusing. If you have any questions or concerns regarding anti-deficiency laws, you should speak with a real estate lawyer immediately. Your lawyer can help determine whether you are protected under anti-deficiency laws, and can inform you of what your options are under law. 

Once a mortgage lender gets a deficiency judgment against you, it can then proceed to collect on that judgment. If the mortgage creditor was a second lien holder in the foreclosure, it is more likely they will pursue collection efforts, especially if they received little or nothing from the foreclosure sale. This article explains the ways a mortgage lender can collect a deficiency judgment. (Learn more about deficiency judgments after foreclosure.)

Judgment Liens

The mortgage lender can get a judgment lien against your personal property and other real estate that you own within the county, giving it a security interest in that property. This means the bank can foreclose on that other real estate—it might do this if you have equity and the bank thinks it'll get enough money to make the effort worthwhile. Even if you own real estate in another county, the mortgage creditor can transfer the judgment to the county where the real property is located.

With a deficiency judgment lien, the creditor also has an interest in any personal property that you owned at the time it filed the judgment lien (subject to any available exemptions you may have). This includes jewelry, equipment, business assets, art, antiques, electronics, and any other valuables.

Wage Garnishments

Just like any other lien creditor, the mortgage creditor can take part of your employment income, often called garnishing your wages. If creditor knows where you work, it may go the garnishment route. (To learn more, see Who Can Garnish My Wages?)

There are some limits as to how much money can be garnished from your income, because you are entitled to exempt some of your personal income. Under federal law, creditors can usually only garnish up to 25% of your take home pay (less for low-income wage earners). Some states have more stringent rules. There may also be limits on how long they can continuously take money out of your paycheck.

Bank Account Levies

The mortgage creditor may also attempt to levy your bank accounts. This may be relatively easy for them to do if you had previously paid the lender with checks drawn on an open bank account. As with your other assets, you may be entitled to exempt a portion—if not all—of the funds in your account. (Learn more about how creditors levy bank accounts.)

Will the Lender Try to Collect the Deficiency?

Just because a mortgage creditor has a deficiency judgment does not mean it will try to collect. Many creditors find that it is just not worth the cost and expense to pursue collection, and instead write-off the debt and issue you a 1099-C. If this happens, you might owe taxes on the forgiven amount. (To learn more, see Will You Owe Income Taxes on Forgiven Mortgage Debt?)

If the Lender Does Try to Collect

If the creditor thinks that you are collectible—for example, because you have steady income or assets—it may take further collection action on the deficiency judgment. If you cannot successfully protect yourself and your assets using defenses and exemptions specific to wage garnishment, levies, attachment, or foreclosure, consider filing bankruptcy. If bankruptcy is not an option for you, you may be able to work out a payment agreement with the creditor.

Vacating Default Deficiency Judgments

If the creditor had taken a default judgment against you and you were unaware of the deficiency case or were unable to defend yourself, you may be able to get the court to vacate (remove) or modify (change) the deficiency judgment. You must act quickly and have acceptable legal and factual reasons for this request. For example, the creditor waited too long to take a deficiency judgment and violated the statute of limitations, which is often shortened in mortgage deficiency actions. Because this can be a complicated, difficult procedure, you should consult with a local attorney or legal aid office immediately.