In general, a deficiency judgment is a type of court order that is issued against a debtor whose assets fail to cover the remaining balance of debt owed to a creditor. Deficiency judgments, also known as unsecured money judgments, most commonly arise in connection with cases involving a sale of mortgaged property.

Specifically, in a real estate context, courts will often award deficiency judgments to mortgage lenders when the proceeds from a foreclosure sale do not offset the full amount still owed by a borrower on a mortgage loan.

As an example, imagine that a borrower defaults on their home mortgage loan. After missing the maximum number of payments allowed under the loan agreement, the lender legally takes possession of the borrower’s home and auctions it off at a foreclosure sale.

The price that the home is sold for during the auction is lower than the amount of debt owed by the borrower on the mortgage loan. Thus, the lender can seek a deficiency judgment to obtain the outstanding debt.

To break down this example one step further, consider the following:

  • Suppose you as the borrower take out a home mortgage loan for $450,000 to pay for a new house that costs $375,000. You do not make any payments on the loan, meaning that you still owe the full $450,000 at the time a lender forecloses on your home. During the foreclosure sale, the house only sells for $350,000. The lender can seek a deficiency judgment from a court requesting that you pay for the remaining $100,000.

Deficiency judgments can cause many complications for a borrower. Thus, if you need help resolving an issue regarding a deficiency judgment or foreclosure dispute, then it may be in your best interest to consider hiring a local real estate attorney or foreclosure lawyer for further legal guidance on the matter.

What Are Anti-Deficiency Laws?

Anti-deficiency laws prevent mortgage companies and other lenders from filing deficiency lawsuits against borrowers to recover outstanding debts. They are sometimes referred to as non-recourse laws.

Anti-deficiency laws also help to protect borrowers from having to pay for any deficiencies leftover after a foreclosure sale. Once the foreclosure sale is complete, a lender cannot recover any further installments from a borrower to satisfy the remaining debts on a loan.

In other words, the lender will only be permitted to recover the mortgaged property that is tied to the borrower’s loan and the proceeds from a subsequent foreclosure sale under these laws. Thus, anti-deficiency laws often cause mortgage companies and other lenders to suffer financial loss since such laws prohibit them from asking a court to compel borrowers to pay for any unsettled amounts.

Even if a court allows a mortgage lender to pursue a deficiency judgment, anti-deficiency laws usually impose a cap on the maximum amount of money that a lender can collect from a borrower.

The standard limitation prescribed by most anti-deficiency laws in regard to deficiency collection is fair market value. This means that a lender cannot collect an amount that is higher than the difference between a borrower’s debt and the fair market value of the property.

It should be noted, however, that only a handful of states recognize anti-deficiency or non-recourse laws. Accordingly, the legal definitions and procedural requirements for these laws will typically vary by state. For example, states with anti-deficiency laws may differ on what the term “fair market value” means based on the economy, the housing market, and the property values in a particular state.

Which States Have Anti-Deficiency Laws?

As previously mentioned, very few states have enacted anti-deficiency or non-recourse laws. As of 2021, only twelve U.S. states recognize anti-deficiency laws. The following is a list of the twelve states that currently have anti-deficiency statutes:

  • Alaska;
  • Arizona;
  • California;
  • Connecticut;
  • Idaho;
  • Minnesota;
  • North Carolina;
  • North Dakota;
  • Oregon;
  • Texas;
  • Utah; and
  • Washington.

In addition, the states in the above list each have their own version of anti-deficiency or non-recourse laws. This means that a borrower may be protected by anti-deficiency legislation in one state, but may not be protected under the same circumstances in another non-recourse state.

For example, the state of Utah recognizes anti-deficiency laws under its property and real estate code. However, the law will not protect a borrower from a deficiency judgment unless the following two requirements are met:

  • The property is no greater than 2.5 acres in size; and
  • The lender is seeking a deficiency judgment specifically for a loan that was used to purchase the foreclosed upon property.

Similar to Utah, North Carolina also has certain requirements to satisfy anti-deficiency laws. Unlike Utah though, North Carolina provides extremely specific guidelines that can be found under its anti-deficiency statute.

For instance, North Carolina’s anti-deficiency statute will only apply to the following types of loans:

  • Rate spread home loans that were taken out either on or after January 1, 2005;
  • Nontraditional mortgage loans;
  • Bridge loans for 12 months or less;
  • Loans issued by individual lenders;
  • Certain reverse mortgages and home equity lines of credit; and
  • A few others that have strict requirements.

When Are Anti-Deficiency Laws Inapplicable?

As discussed above, not every state has anti-deficiency laws. Accordingly, borrowers who reside in states without anti-deficiency laws will not receive the same protections against deficiency lawsuits brought by lenders. Thus, they may be compelled by a court to make up for any remaining deficiencies.

Even if a state has adopted anti-deficiency legislation, the statute may not be applicable in certain situations. Some common examples of situations in which anti-deficiency laws may not apply to a deficiency lawsuit include when:

  • The loan at issue is for a second mortgage;
  • The property is being used as a secondary residence or for some other purpose that does not qualify it as the borrower’s primary residence;
  • The loan was not used to purchase the primary residence or other property in question;
  • The property was foreclosed on as a result of a judicial sale (i.e., a court ordered the foreclosure sale); or
  • The borrower acquired the property through fraud or by fraudulent means.

As is evident from the above information, it is very important that borrowers review the laws of their particular state. For example, while California’s anti-deficiency statutes may protect borrowers who take out a second mortgage, many states (both with and without these statutes) will not provide the same protections for borrowers.

In addition, borrowers may want to consult with a local foreclosure lawyer to ensure that the anti-deficiency laws in their state are applicable to the facts of their individual case.

What Is the One-Action Rule?

The one-action rule essentially states that the only way for a mortgage lender to recover the debt that a borrower owes on a mortgage loan is to foreclose on the property. The main purpose of one-action rules is to prevent multiple lawsuits and to encourage lenders to use the foreclosure process as their primary source of repayment. It should be noted that these rules will often vary by state and not every state has enacted them.

As an example, in California, a lender must first seek recovery either through a judicial or nonjudicial foreclosure sale. Only after this remedy is exhausted will the lender be allowed to sue a borrower for the remaining balance of debt on a mortgage loan.

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

Generally speaking, a borrower cannot waive their right to be protected under anti-deficiency laws if they are listed as the primary borrower on a mortgage loan. The reason for this is because anti-deficiency laws are considered to be a matter of public policy and thus private parties may not waive anti-deficiency requirements through mutual agreement or by contract.

If a state does permit a borrower to waive anti-deficiency protections, however, then the state law must supply an explicit reason for doing so.

On the other hand, some states may allow a borrower to waive their right to anti-deficiency protections if the borrower is also a guarantor of a mortgage loan. Briefly, a guarantor is an individual who agrees to pay for any unpaid debt on a loan if the borrower who took out the loan defaults.

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

In general, cases involving mortgages, deficiency judgments, and/or foreclosures tend to contain fairly complex legal issues. These issues only become more complicated when they concern anti-deficiency law matters. This is because anti-deficiency laws are only available in a handful of states, lack uniform standards in the states that do have them, and rarely apply to a case in a straightforward manner.

Therefore, if you need help with a legal matter that involves an anti-deficiency law issue, then it may be in your best interest to speak to a local foreclosure lawyer immediately. An experienced foreclosure lawyer can provide important advice about anti-deficiency laws. Your lawyer can also determine whether you are protected by anti-deficiency laws in your state.

In addition, your lawyer can discuss other options that may be available to you if you live in a state without anti-deficiency statutes.