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 do 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?
Therefore, 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.
Thus, 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.
For this reason anti-deficiency laws tend to protect the borrower rather than the lender in a mortgage arrangement.
When are Anti-Deficiency Laws Inapplicable?
To begin with, 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.
Also, 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 for a home equity line
- The property is not being used as the primary residence of the borrower
- The foreclosure sale was ordered by a court of law (“judicial sale”)
Finally, 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 question about the rules in your area.
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 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.
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Last Modified: 08-10-2011 02:09 PM PDT
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