After a foreclosure in Washington, may your lender get a deficiency judgment against you?
If you go through a Washington 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 auction results in a shortfall, the lender may get a “deficiency judgment” against the borrower in certain jurisdictions. However, under Washington law, the lender is normally barred from seeking a deficiency judgment against a foreclosed homeowner, therefore most individuals in the state will not face one. In rare cases, the lender may be able to get a deficiency judgment against a foreclosed homeowner in Washington.
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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.
How Do Foreclosures in Washington Work?
In Washington, most foreclosures are nonjudicial, which means the lender does not have to go through state court to foreclose. The lender might also seek 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.
In Washington, Deficiency Judgments Are Not Allowed Following Nonjudicial Foreclosures.
If the lender decides to foreclose nonjudicially, the lender cannot get a deficiency judgment in Washington. 61.24.100 (Wash. Rev. Code). However, judicial foreclosures are an another situation.
In Judicial Foreclosures, Deficiency Judgments Are Allowed
A shortfall judgment is granted if the lender files for judicial foreclosure. 61.12.070 (Wash. Rev. Code). However, the court may impose a minimum bid price or hold a hearing to determine the fair market value of the repossessed property. The shortfall judgment is thus confined to the smaller of the following differences:
the existing debt and the foreclosure selling price, or the outstanding debt and the fair market value of the residence (Washington Revised Code 61.12.060).
Even if a shortfall judgment is permitted, the lender may choose to waive the deficiency in order to shorten the redemption term. 61.23.020 (Wash. Rev. Code).
In Washington, Deficiency Judgments Following Short Sales
When you sell your property for less than the entire debt sum left on your mortgage, the profits pay down a part of the loan principal. Following a short sale, a lender in Washington 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 Washington, 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.
According to at least one Washington court ruling, a lender may not seek a deficiency judgment after a deed in lieu of foreclosure. The court decided in Thompson v. Smith, 58 Wash. App. 361 (1990), that the borrower was entitled to protection under Washington’s anti-deficiency legislation since the deed in lieu of foreclosure constituted basically a nonjudicial foreclosure.
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 is sold out in this fashion, and the profits of the foreclosure auction are insufficient to cover 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.
Obtaining Foreclosure Assistance in Washington
Consider speaking with a foreclosure attorney if you have concerns about Washington’s foreclosure procedure or want to learn about viable foreclosure defenses and maybe challenge the foreclosure in court.