After a foreclosure in New York, may your lender get a deficiency judgment against you?
If you are going through a foreclosure in New York, the foreclosure auction 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.”)
If a foreclosure sale results in a shortfall, the lender may get a “deficiency judgment” (a personal judgment) against the borrower in most states, including New York. However, in New York, the lender must seek a deficiency judgment within a certain time frame, and if the lender does seek one, the court may restrict the amount of the judgment. Furthermore, the lender may get a deficit judgment only if it physically serves you with notice of the litigation or if you participate in the action.
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 the foreclosure process, 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.) And different jurisdictions have different procedural criteria to get a deficit judgment, and other states do not allow deficiency judgments in certain instances, such as after 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.
Deficiency Judgments Following Foreclosures in New York
In New York, foreclosures are judicial, which means the lender must foreclose via the state court system. The foreclosing lender initiates the foreclosure process by filing a lawsuit (a “complaint”) against the borrower. If you do not respond to the action, the lender will request and almost certainly get a default judgment, allowing it to conduct a foreclosure auction.
However, if you choose to reply to the foreclosure action, the matter will be litigated. The lender may then request that the court award summary judgment. A summary judgment motion requests that the court award judgment in favor of the lender since the key features of the case are undisputed. If the lender wins on summary judgment or you lose at trial, the judge will issue a judgment and order your property auctioned at auction. If the foreclosure sale does not generate enough money to pay off the debt, the lender may get a deficiency judgment—subject to certain conditions. (New York Real Property Act Law 1371).
There is a time limit for requesting a Deficiency Judgment.
The lender must seek a deficiency judgment within 90 days of the foreclosure sale’s completion. (The transaction is considered “completed” when the deed is presented to the buyer.) This deadline serves as a statute of limitations. 1371(2) of the New York Real Property Act).
Typically, the lender files a move for an order confirming the sale together with a request for a deficiency judgment. 1371(2) of the Real Property Act of New York .
Limitation on Fair Market Value
The shortfall is restricted by the property’s fair market value, as determined by the court. As a result, the deficiency judgment amount is equal to the borrower’s total debt minus the market value assessed by the court or the selling price of the property, whichever is greater (N.Y. Real Prop. Act. Law 1371(2)).
Personal Service Is Necessary
Only if you are physically served with the summons or make an appearance in the foreclosure proceeding may the lender get a deficiency judgment. 1371(1) of the Real Property Act of New York .
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 imply you do not owe money to junior lienholders.
Assume a junior lienholder, such as a second mortgage lender, is sold out in this fashion, and the profits of the foreclosure sale are insufficient to cover what you owe to that junior lienholder. In such instance, the junior lienholder might sue you personally on the promissory note for 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.
Obtaining Foreclosure Assistance in New York
Consider speaking with a foreclosure attorney if you have concerns regarding New York’s foreclosure procedure or want to learn about possible foreclosure defenses, such as a statute of limitations defense, and maybe challenge the foreclosure in court.
If you wish to learn about alternative loss mitigation strategies, you should also speak with a HUD-approved housing counselor. You may acquire a list of HUD-approved housing counseling organizations in your region by utilizing the Consumer Financial Protection Bureau’s Find a Counselor service. You may also contact the Homeownership Preservation Foundation (HOPE) Hotline at 888-995-HOPE, which is available 24 hours a day, seven days a week (4673).