After a foreclosure in Texas, may your lender get a deficiency judgment against you?
If you go through a Texas 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.”)
If a foreclosure sale results in a shortfall, the lender may get a deficiency judgment against the borrower in certain areas, such as Texas, but not if the loan is an equity loan.
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.
Texas Foreclosures and Deficiency Judgments
In Texas, there are three types of foreclosure procedures: judicial, nonjudicial, and quasi-judicial.
In both judicial and nonjudicial foreclosures, deficiency judgments are permitted.
Most foreclosures in Texas are nonjudicial, which means that if the loan contract (usually a deed of trust) has a power of sale provision, the lender may foreclose without going to court. However, if the contract does not include a power of sale provision, or if other conditions exist, the lender will undertake a judicial foreclosure procedure.
In Texas, the lender may receive a deficit judgment in both judicial and nonjudicial foreclosures. (Texas Probate Code 51.003, 51.004).
Limitations Period Following a Nonjudicial Foreclosure
In the case of nonjudicial foreclosures, the lender must file a lawsuit within two years after the foreclosure sale to secure the shortfall judgment. 51.003 (Tex. Prop. Code).
Offset for Fair Market Value
According to Texas law, the borrower is entitled to credit for the property’s fair market value. To persuade the court of the fair market worth, you must provide evidence such as expert opinion testimony (such as that of an appraiser) or similar sales data. (Texas Probate Code 51.003, 51.004). You must seek a review of the fair market value in order to get the offset:
either replying to the lender’s deficiency judgment action after a nonjudicial foreclosure, or by bringing your own lawsuit within 90 days of a judicial foreclosure sale (Tex. Prop. Code 51.003, 51.004).
Equity Loans Do Not Allow Deficiency Judgments
To foreclose equity loans, such as a home equity loan or home equity line of credit, a quasi-judicial procedure is employed in Texas. Before initiating a nonjudicial foreclosure, the lender must get a court order authorizing the foreclosure. (Texas Civil Procedure Rule 735).
A shortfall judgment after the foreclosure of an equity loan is not permitted under Texas law. Article XVI, Section 50(a)(6)(C) of the Texas Constitution.
Obtaining Foreclosure Assistance in Texas
Consider speaking with a foreclosure attorney if you have concerns regarding Texas’s foreclosure procedure or want to learn about viable foreclosure defenses and maybe challenge the foreclosure in court.