Deficiency Judgments

Generally speaking a deficiency judgment is a court order which allows a lender to take possession of and liquidate (sell) any asset of a debtor who has defaulted in order to satisfy the original debt.  Auto finance companies routinely seek deficiency judgments after repossessing a vehicle.   

Deficiency Judgments in Foreclosures

If a borrower defaults on a mortgage, depending upon the foreclosure law of the state in which the debtor resides, the mortgage company may seek a deficiency judgment.  The possibility of a deficiency judgment is of great concern to most homeowners facing foreclosure.  Because the laws dealing with deficiency judgments vary from state to state, it is impossible to give state specific information for all 50 states in this article. Therefore, I will give you some general information about deficiency judgments and I recommend that you seek the advice of an experienced real estate attorney to learn about deficiency judgments in your state or visit http://foreclosurelaws.org.

Deficiency Judgment Laws Vary by State

Some states, such as Georgia, have relatively liberal laws regarding deficiency judgments after a foreclosure.  In Georgia, if a lender utilizes the non-judicial foreclosure process, in order to obtain a deficiency judgment, it must first have the sale confirmed.  The confirmation process is a legal proceeding whereby the lender must demonstrate that the sale was, in all aspects, fair and that the property was sold for fair market value.

At the other end of the spectrum is California.  Under California law, if a lender utilizes the non-judicial foreclosure process, it cannot seek a deficiency judgment against the debtor.  This is known as the single action rule.  Essentially, in exchange for the ease and swiftness of a non-judicial foreclosure, a lender is agreeing to forgo a deficiency judgment.

Moreover, California also has what is called the acquisition loan rule.  This rule prevents a lender from seeking a deficiency judgment if the loan was used to purchase the property and the property is a one to four family residence in which the borrower intended to live at the time he obtained the loan.

Judicial Foreclosure Process

On the other hand, if a lender in California chooses to utilize the judicial foreclosure process, it may seek a deficiency judgment.  Here's how it works.  Once the lender forecloses and sells the property, it can file a complaint seeking a deficiency judgment. At the hearing, the lender must present evidence of the amount of the debt owed as well as the amount of the sale.  Once the court issues the deficiency judgment, the lender will have the judgment recorded in the real estate records of any county in which the debtor may own property.  Additionally, the lender can seek to collect the debt by garnishing the debtor's wages or bank accounts or by levying on any personal property the debtor may own.

Redemption

Keep in mind that many states allow a redemption period after a foreclosure.  If the homeowner tenders the full amount due on deficiency judgment, including interest, late fees, attorney's fees, and court costs, the lender must return the property to the homeowner.  In most states that have a redemption period, it is about one year; although, it can be shorter.  In states that allow a borrower to redeem the loan, the lender is prohibited from selling the property until the redemption period has expired.

Is Deficiency Judgment Common?

Because of the time and cost involved in seeking a deficiency judgment as well as the fact that most debtors who have lost a home in foreclosure are judgment proof (i.e. they have very little money and few assets that would be worth levying on), most lenders choose not to seek a deficiency judgment.  The exception to this would be situations involving very wealthy borrowers with significant assets.

If you are negotiating a short sale or a deed in lieu of foreclosure with your lender, it is imperative that your lender agree in writing to relieve you of any further liability for any short fall or loss the lender incurs as a result of the short sale or deed in lieu.  By getting the lender to agree to this in writing, it will prevent the lender from later seeking a deficiency judgment against you.  Keep in mind, depending upon the laws in your state, you may be able to use those laws as leverage in negotiating a short sale or deed in lieu of foreclosure with your lender.

• If you may be facing foreclosure or already in the process, Consult Your Case for Free with a local certified Foreclosure Attorney to see your best options you have available to avoid Foreclosure.