A foreclosing lender in Wisconsin has the power to obtain a deficiency judgment against you. However, it may have an incentive not to do so.
If you go through a Wisconsin foreclosure, 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” against the borrower in most states, including Wisconsin. However, if the property’s fair market value exceeds the foreclosure sale price, Wisconsin law restricts the amount of the deficit. Furthermore, state law provides an incentive for the lender to waive the shortfall: if the lender decides to forego a deficiency judgment, the redemption time before the sale is reduced.
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.) 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.
Following Wisconsin Foreclosures, Deficiency Judgments
In Wisconsin, foreclosures are judicial, which means the lender must go via the state court system. A judicial foreclosure occurs when a lender files a lawsuit in order to get a court judgment permitting a foreclosure sale. The lender serves a summons and complaint on the borrower and any other defendants in the case to serve notice of the litigation. If the lender requests one in its complaint, the lender may get a deficiency judgment as part of the foreclosure process in Wisconsin. 846.04 (Wis. Stat.).
Wisconsin Limitations on Deficiency Judgments
Again, under Wisconsin law, a lender may get a shortfall judgment in a judicial foreclosure. However, the court will not infer that the house sold for its fair value at the foreclosure auction, and the court may not confirm the sale or issue a deficiency judgment unless it is satisfied that the property’s fair value has been credited to the mortgage obligation. As a result, if the foreclosure selling price is less than the property’s fair market value, the amount of the shortfall is limited to the difference between the borrower’s mortgage debt and the home’s fair market value (Wis. Stat. 846.16).
Redemption Periods Reduced If the Lender Waives the Deficiency Judgment
In Wisconsin, the foreclosure auction occurs after a redemption period. The borrower has the right to halt the foreclosure during the redemption period by paying the entire amount of the foreclosure judgment, plus interest and charges (Wis. Stat. 846.13).
The redemption time is reduced if the lender waives its entitlement to a deficiency judgment. Because of the option of a reduced time, lenders in Wisconsin often choose not to pursue deficiency judgments against borrowers. The redemption term information below pertains to owner-occupied, one- to four-family properties on less than 20 acres.
Mortgages completed before to April 27, 2016 have a redemption period. The foreclosure sale cannot take place until 12 months after the court issues a foreclosure judgment. 846.10 (Wis. Stat.). The redemption time is reduced from 12 months to six months if the lender waives its entitlement to a deficiency judgment. (The lender may waive the deficiency judgment and reduce the redemption term only if the borrower agrees in writing at the time of mortgage signing. In most Wisconsin mortgages, the borrower agrees to a shorter redemption time provided the lender waives the deficiency judgment.) 846.101 (Wis. Stat.).
Mortgages signed on or after April 27, 2016 have a redemption period. The foreclosure sale cannot take place until six months after the court issues a foreclosure judgment (Wis. Stat. 846.10). The borrower may petition the court to extend the redemption term to eight months if the borrower is endeavoring to sell the mortgaged property in good faith and has entered into a listing agreement with a licensed real estate broker.
The redemption term is reduced to three months if the lender waives its entitlement to a deficiency judgment. (Once again, the lender may waive the deficiency judgment and reduce the redemption time only if the borrower agrees in writing while signing the mortgage. In most Wisconsin mortgages, the borrower agrees to a shorter redemption time provided the lender waives the deficiency judgment.) The borrower may petition the court to extend the redemption term to five months if the borrower is endeavoring to sell the mortgaged property in good faith and has engaged into a listing agreement with a licensed real estate broker (Wis. Stat. 846.101).
There is a five-week redemption period for abandoned houses. Whether or whether a shortfall is sought, the redemption time is five weeks if you leave (move out of) the residence. (Wisconsin Statute 846.102.)
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 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 Wisconsin
Consider speaking with a foreclosure attorney if you have concerns about Wisconsin’s foreclosure procedure or want to learn about viable foreclosure defenses and maybe challenge the foreclosure in court.