If you go through foreclosure in Michigan and the selling price is less than the amount of your mortgage, your lender may sue you for the “deficiency.”
In a foreclosure, the total amount owed by the borrower may surpass the foreclosure selling price. A “deficiency” is the difference between the total debt and the selling price.
To collect the deficit, the foreclosing bank may pursue a personal judgment, known as a “deficiency judgment,” against the debtor in various jurisdictions, including Michigan. Generally, depending on state law, if a deficiency judgment is obtained against you, the bank may collect the amount—in our case, $50,000—through traditional collection means, such as garnishing your salary or levying your bank account.
Again, if your Michigan property sells in a foreclosure sale for less than the amount owed on your mortgage loan, the bank that is foreclosing might get a deficiency judgment. However, under some conditions, you may be able to contest the deficit.
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In Michigan, How Does Foreclosure Work?
In Michigan, the majority of foreclosures are nonjudicial, which means the bank does not have to go to court. Judicial foreclosures are also permitted. The bank forecloses via the state court system in a judicial foreclosure.
Following Nonjudicial Foreclosures, Deficiency Judgments
Following a nonjudicial foreclosure, the foreclosing bank in Michigan may get a deficiency judgment by filing a lawsuit.
If the bank is the buyer, you may contest the deficiency judgment.
The foreclosing bank will normally make a “credit bid” during the foreclosure auction. The bank bids on the debt that the borrower owes via a credit bid. Essentially, the bank receives a credit in this amount. The bank may offer the whole amount of the debt, including foreclosure fees and charges, or it can offer a lower sum. If the bank wins the auction, it becomes the new owner of the property.
If the bank was the purchaser at the foreclosure auction, the borrower may appeal the deficit.
The property was either worth more than the amount owed at the time of sale, or the foreclosure selling price was much less than the property’s fair market value. 600.3280 (Mich. Comp. Laws).
If you can show the court that one of these conditions applies, you may be able to minimize or eliminate your obligation for the deficit.
Judicial Foreclosures and Deficiency Judgments
If the bank decides to go through with a judicial foreclosure, it may acquire a deficiency judgment as part of the procedure. 600.3150 (Mich. Comp. Laws). As part of the foreclosure process, the court may establish a minimum selling price at which a buyer must bid on the property. 600.3155 (Mich. Comp. Laws).
Deficiency Judgment in Michigan Following a Short Sale or Deed in Lieu of Foreclosure
A “short sale” occurs when you sell your house for less than the entire amount of debt owed, and the profits pay down a part of the remainder. A “deed in lieu of foreclosure” (deed in lieu) occurs when a bank decides to accept a deed to a property rather than foreclose. (The deficiency amount with a deed in lieu is the difference between the total debt and the fair market value of the property.)
After a short sale or deed in lieu in Michigan, the bank may get a deficiency judgment. To prevent a deficiency judgment in any of these cases, the agreement must specifically declare that the bank waives its right to a shortfall. If the contract does not include this waiver, the bank may sue for a deficiency judgment. However, if the bank forgives the shortfall, you may face tax implications.