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As a homeowner, you don’t plan on having to deal with foreclosure – and hopefully, you won’t ever have to. You can help prevent foreclosure by making your payments on time and communicating with your lender, but sometimes life hits unexpectedly hard, making it difficult or impossible to pay your mortgage.
A single late payment isn’t necessarily cause for concern, but if you continually fail to make payments on your mortgage and can’t make other arrangements with your lender, your lender will eventually foreclose on the home and sell it at auction.
Many borrowers think their debt to the lender is settled with that sale, but sometimes, the sale price doesn’t cover the total amount owed to the lender.
The difference between the sale price and the amount still owed on the mortgage is known as a deficiency. Following the foreclosure sale, the lender can choose to pursue a deficiency judgment, which is a court ruling allowing the lender to recover the remaining amount of money that you owe them.
What Is a Deficiency Judgment?
A deficiency judgment is a court ruling that gives your lenders the right to take money or other assets from you to cover the remaining balance of what you owe them. A deficiency judgment:
- Takes effect if the lender elects its right to come after the debtor for the deficiency, and a deficiency judgment is granted by the court.
- Can affect borrowers who owe more on their mortgage than their home is worth (the mortgage is underwater).
- Involves a lender (the creditor), a debtor (the borrower) and the court that issues the deficiency judgment to the lender.
Which States Allow Deficiency Judgments?
While some states prohibit deficiency judgments following a foreclosure sale, most states still allow lenders to pursue the money they’re owed. Keep in mind that even though a lender has a right to get a deficiency judgment against you, they may not choose to exercise that right.
The majority of states permit deficiency judgments and currently, the only states with anti-deficiency statutes or nonrecourse laws are:
- North Carolina
- North Dakota
Also, each state has specific laws on how and when it will and won’t grant a deficiency judgment. For example, some states have strict limits on how much money a lender can claim in a deficiency judgment, while others require the amount owed on a property to be under a certain threshold before allowing an anti-deficiency law to kick in.
So if you’re in a position where you are at risk of foreclosure, check your specific state laws to find out if there are deficiency limits. Since each state’s laws regarding deficiency judgments may be different, contact an attorney to learn more about the rules in your state.
How Does a Deficiency Judgment Work?
A deficiency judgment can be awarded to a lender by a court, giving the lender the right to claim the money debtors owe them to cover the deficiency.
Before they can file for a deficiency judgment, your lender needs to have been awarded a foreclosure judgment and held a foreclosure sale of your home. The lender can’t wait indefinitely; certain states may have a specific time frame (usually between 3 – 12 months) during which lenders have to file for a deficiency judgment.
If a deficiency judgment is awarded to your lender, you are responsible for paying the debt and your lender can collect money to cover a deficiency by garnishing wages, freezing bank accounts or seizing assets.
Example of a deficiency judgment
Let’s say you and your partner bought a house in Florida for $400,000. Unfortunately, you lost your job and your partner’s income isn’t enough to cover the payments on the house.
You still owe $360,000 and after waiting the legally required 120 days. your lender chose to go through the foreclosure process and sold your house at auction for $340,000. After the sale, you’re left with a deficiency balance of $20,000. Your lender decides to go to court to get a deficiency judgment so they can collect the $20,000 you still owe them.
What Can You Do When Facing a Deficiency Judgment?
If you’re facing a deficiency judgment, some options exist that can help you. In most cases, you’ll want to consult with an attorney, but they may be able to ask your lender to waive the judgment or accept a settlement offer.
Also, mistakes happen and if you’re not actually in default or your lender failed to do their due diligence, you may be able to file an opposing motion to have the deficiency judgment dismissed.
How Can You Protect Yourself from a Deficiency Judgment?
The best way to protect yourself from a deficiency judgment is to avoid defaulting on your mortgage by keeping up with your monthly payments. However, if you find yourself struggling to make your payments and are at risk of foreclosure, consider taking action to prevent a deficiency judgment.
Refinance your mortgage
If your credit is good, you may be able to refinance your mortgage to either get a lower interest rate or extend your mortgage repayment period to lower your payments.
Ask your lender to reduce your payments
Your lender doesn’t want to foreclose if they don’t have to. Instead, they may be willing to cut you some slack if you can convince them you’ll be able to make your payments again in the near future.
In these circumstances, lenders may allow options like mortgage forbearance. This is where your lender could temporarily reduce or pause your payments, or they agree to adjust your terms to make your loan more affordable through a loan modification.
Consider a short sale
If you and your lender feel that you won’t be able to keep up with your mortgage payments, they may agree to a short sale. This involves you selling your home for less than the balance of your mortgage. Your lender understands that they won’t collect the full amount that they’re owed, but they may accept less money if it allows them to avoid the complications involved with foreclosure.
Look for government support
Ask your lender about federal housing support programs like the Making Home Affordable Program or Federal Housing Administration – Home Affordable Modification Program. These programs can provide you with support to help you cover your payments and connect you with a housing counselor who can help you negotiate a solution with your lender.
While not the best option, sometimes the best way out of debt is to declare bankruptcy. Declaring bankruptcy can help give you the breathing room you need to settle your debts and come to an agreement with creditors like your lender.
You’ll probably need to declare either Chapter 7 bankruptcy or Chapter 13 bankruptcy, and you’ll need to work with a bankruptcy attorney who can help you to settle your debts.
Deficiency Judgments: Know Your Rights
Having a deficiency judgment against you can be scary, but it isn’t the end of the world. Lenders can take alternative approaches to settle a deficiency balance after a foreclosure sale, so proactively communicating with your lender can help you avoid a deficiency judgment.
In some cases, you may find that with the help of an attorney, there are other ways to fight a deficiency judgment.
Experian™. “What Happens If I Don’t Pay a Deficiency Balance?” Retrieved June 2022 from https://www.experian.com/blogs/ask-experian/what-happens-if-i-dont-pay-a-deficiency-balance/
Consumer Financial Protection Bureau. “I can’t make my mortgage payments. How long will it take before I’ll face foreclosure?” Retrieved June 2022 from https://www.consumerfinance.gov/ask-cfpb/i-cant-make-my-mortgage-payments-how-long-will-it-take-before-ill-face-foreclosure-en-1849/