What is a “Deficiency Judgment”?
A “Deficiency Judgment” is a type of legal proceeding that is typically issued when a borrower fails to pay the full mortgage amounts that are owed on the home or property. After the borrower has defaulted, the property may be sold in a foreclosure sale in order to satisfy the debt.
However, if the proceeds from the property sale are less than the amount owed, then the mortgage lender may have to initiate a deficiency judgment to compel the borrower to make up for the difference in costs. For example, if a lender has lent a $10,000 mortgage, but the foreclosure sale only yields $9,000, the lender may sue the borrower in a deficiency suit. Here, they would be entitled for the remaining amount, which would be $1,000.
When is a Deficiency Judgment available?
Not all states allow deficiency judgments. However, unless otherwise stated, a lender may obtain a deficiency judgment any time after the foreclosure sale has been completed. This means that they can hold the borrower liable for the difference between the mortgage debt and the amount obtained from the foreclosure sale.
However, it is often standard practice that the borrower must provide their informed consent to a deficiency judgment. That is, the borrower must first knowingly agree to be liable for any deficiencies in the event of a foreclosure. The agreement to be liable is usually contained within the mortgage document itself.
If the mortgage document contains a consent clause for deficiency judgment, then the mortgage is called a “recourse mortgage”. If the mortgage does not contain such a clause, then the borrower cannot be held liable for deficiencies. These second types of mortgages are called “non-recourse mortgages”.
Thus, depending on the laws of the state that you are located in, the borrower must first consent to a deficiency judgment before the lender can file a claim for a deficiency judgment.
When is a Deficiency Judgment not Available?
As mentioned, deficiency judgments may not be available in all states. For example, some states may have anti-deficiency statutes, which prohibit deficiency judgments under certain circumstances. California is an example of a state that has anti-deficiency statutes.
Also, some states do not allow deficiency judgments if the foreclosure occurs on the first mortgage that was used to purchase the home. Some state laws also require the lender sell the property before they are allowed to collect deficiencies from a borrower. In most cases, a deficiency judgment will not be allowed if the lender did not inform the borrower of the property sale before attempting to collect the deficiency amounts.
Finally, deficiency judgments may be modified according to “fair value” statutes. If your state operates according to fair value legislation, the court will first determine the fair value of the property according to market values, which may be less than the actual listing of the property.
In the example above, a fair value determination may reveal that the house is actually only worth $9,000 instead of $10,000. In that case, the borrower would not be liable for any deficiencies, since the foreclosure sale already yielded $9,000.
Do I need a Lawyer for a Deficiency Judgment?
If you will be involved in a deficiency judgment, you almost certainly will be requiring the assistance of a lawyer. Your lawyer will be able to determine whether a deficiency judgment is appropriate according to the real estate laws of your state. You may also wish to consult with an attorney early on in the process, for example before you agree to sign onto a mortgage. That way, your lawyer can help review the mortgage documents for you and inform you as to whether a deficiency judgment could be possible in the future.
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Last Modified: 04-13-2011 03:48 PM PDT