Can your lender get a deficiency judgment against you after a Missouri foreclosure?
If you go through a Missouri foreclosure, the foreclosure sale may result in a shortfall. (When the foreclosure selling price does not meet the amount of the borrower’s mortgage obligation, the difference is referred to as a “deficiency.”)
Example. If the borrower’s entire debt is $500,000, but the house sells at a foreclosure auction to the highest bidder for $450,000, the deficit is $50,000.
If a foreclosure auction results in a shortfall, the lender may get a “deficiency judgment” (a personal judgment) against the borrower in certain jurisdictions, such as Missouri.
The Process of Foreclosure Sales
If you fail on your mortgage loan, the lender might sell your property via a legal procedure known as “foreclosure” to satisfy the unpaid amount. After the lender has met all of the legal conditions for foreclosure, the last stage in a judicial or nonjudicial foreclosure is the foreclosure sale, in which the house is sold at a public auction to a new owner.
The foreclosing lender makes the initial offer at the auction, known as a “credit bid.” A credit bid provides the lender with credit in the amount of the borrower’s debt. The lender has the option of bidding up to the complete amount of the debt, including foreclosure fees and charges, or bidding less. Because no one else offers, the lender usually makes the highest bid during the auction and becomes the new owner of the property. If the lender purchases the property during the sale and obtains title, the property is termed “real estate owned” (REO).
At foreclosure auctions, lenders often bid less than the whole amount of a borrower’s mortgage obligation.
After a Foreclosure Sale, What Is a “Deficiency Judgment”?
When a lender takes possession of a property via foreclosure, and if state law permits it, the lender might pursue a personal judgment against the borrower to collect any deficit. A “deficiency judgment” is a kind of money judgment. As part of the judicial foreclosure procedure in certain jurisdictions, the lender may seek a deficiency judgment. In certain areas, the lender must sue the borrower separately after the foreclosure to get a deficiency judgment.
However, if the selling price is equal to or more than the mortgage debt amount, you are not liable since there is no deficiency—even if the lender is unable to resell the property for the same amount after the foreclosure sale. In fact, if the sale resulted in a surplus of funds, you may be entitled to that additional cash after the foreclosure auction. However, if the residence has any junior liens, such as a second mortgage or HELOC, or if a creditor lodged a judgment lien on the property, those parties get the cash to settle the amount owing. The funds remaining after paying off these obligations then go to the foreclosed homeowner.
Deficiency judgments are sometimes limited by state law.
Deficiency judgements are occasionally subject to limitations under state law. Some jurisdictions limit the amount of a deficiency judgment, such as requiring the borrower to get credit for the home’s fair market value if the foreclosure sale price is less. In other words, while computing the shortfall amount, the property’s fair market value is substituted for the foreclosure sale price.
Other states impose time restrictions for lenders to obtain a deficiency judgment against a borrower, ranging from three months to one year following the foreclosure sale. (Speak with a foreclosure lawyer in your state to learn the time restriction in your state.)
Furthermore, different jurisdictions have different procedural criteria for obtaining a deficit judgment, and some states do not allow deficiency judgments in certain instances, such as following nonjudicial foreclosures.
How Do Lenders Get Deficiency Judgments?
In general, if a lender obtains a deficiency judgment, it may collect the amount (in the case above, $50,000) from the borrower by traditional collection tactics such as wage garnishment or levying a bank account.
Even if your lender obtains a shortfall judgment, you may very certainly discharge your responsibility for a deficiency judgment, along with many other dischargeable debts, in a Chapter 7 or Chapter 13 bankruptcy.
Will My Lender File a Deficiency Judgment Against Me?
Even though your lender has the legal authority to pursue you for a deficiency judgment, it may choose not to do so, particularly if you don’t have a lot of assets to fulfill the judgment. The lender may determine that it is not worth the cost and effort of obtaining a deficit judgment.
Nonetheless, you should be aware of the possibility of your lender pursuing you for a deficit following a foreclosure. Furthermore, even if the lender chooses not to sue you for a deficiency judgment, it may subsequently transfer the loan to a debt buyer, who may later sue you for the deficit.
Missouri Foreclosure Procedures
The majority of Missouri foreclosures are nonjudicial, which means the lender does not have to go through state court to foreclose. (Alternatively, the lender might opt to foreclose via the state court system, which is known as a “judicial foreclosure.”) However, in places where a nonjudicial foreclosure procedure is available, lenders nearly invariably prefer this option over a judicial foreclosure since an out-of-court foreclosure is comparatively fast and cheap.)
Missouri Deficiency Judgments
Deficiency judgments are permitted in Missouri after a nonjudicial foreclosure sale provided the lender files a separate litigation. Missouri Revised Statute 443.240. (In judicial foreclosures, deficiency judgements are also permissible.)
Even if the selling price is less than the property’s fair market value, the amount of the deficiency judgment will normally be the loan debt minus the amount paid for the property at the foreclosure auction.
It is very difficult to avoid a foreclosure sale based on a low sale price.
If you believe the foreclosure sale price was insufficient, you may file an action to nullify the transaction. However, the transaction will be nullified only if the selling price was so low in comparison to the fair market value that it “shocks the conscience” of the court and is proof of fraud, a threshold supported by the Missouri Supreme Court in First Bank v. Fischer & Frichtel, Inc., 364 SW 3d 216. (Mo. 2012). This norm is a difficult weight for a homeowner to bear. Indeed, Missouri’s threshold for demonstrating a foreclosure sale “shocks the conscience” is among the most stringent in the nation. A court has refused to set aside a transaction when the property sold for barely 20-30% of its fair market value on several occasions.
Interestingly, while the First Bank decision ultimately upheld Missouri’s long-standing standard for deficiency judgment amounts, it left the door open for potentially revisiting the issue of how to measure a deficiency in the future and, with the right facts and circumstances, possibly even changing the standard in Missouri at some point down the line.
Missouri Deficiency Judgments Following Short Sales
When you sell your house for less than the entire debt sum left on your mortgage, the profits of the sale are used to pay down a part of the loan. Following a short sale, a lender in Missouri might get a deficiency judgment.
To avoid a deficiency judgment, the lender must specifically relinquish its entitlement to the shortfall in the short sale agreement. If this waiver is not included in the short sale agreement, the lender may initiate a lawsuit to get a deficiency judgment.
In Missouri, Deficiency Judgments Following Deeds in Lieu of Foreclosure
A “deed in lieu of foreclosure” happens when a lender decides to take a deed (title) to a property rather than foreclosing. The deficiency amount in a deed in lieu of foreclosure is the difference between the total mortgage obligation and the property’s fair market value.
A deed in lieu of payment is often assumed to completely discharge the obligation. However, a lender may attempt to make the borrower accountable for a shortfall resulting from a deed in lieu. In order to prevent a deficiency judgment, the agreement must specifically specify that the transaction fully pays the debt. If this clause is not included in the deed in lieu contract, the lender may initiate a lawsuit to seek a deficiency judgment. Again, if the loan is forgiven, you may be subject to taxation.
What Happens to Second Mortgages, Home Equity Lines of Credit, and Other Junior Liens?
When a senior lienholder forecloses, any junior liens, such as second mortgages and HELOCs, are likewise foreclosed, and the junior lienholders lose their security interest in the real estate. Junior lienholders are frequently referred to as “sold-out junior lienholders” in this case. However, this does not absolve you of your obligation to junior lienholders.
Assume a junior lienholder, such as a HELOC lender, is sold out in this fashion, and the profits of the foreclosure sale are insufficient to satisfy what you owe to that junior lienholder. In such instance, the junior lienholder may sue you personally on the promissory note of the loan. So, if the equity in your property is insufficient to satisfy second and third mortgages, for example, you may face litigation from those lenders to collect the remaining balances.