What is a Deficiency After Foreclosure?
Many houses are “underwater,” meaning that the homeowner owes more than the house is worth. When a mortgage lender forecloses on a home, the property goes to Sheriff Sale. After the Sheriff Sale, the borrower is entitled to a credit for fair market value on the amount owed. After getting credit for fair market value, any additional amount still owed is known as the deficiency, also called a deficiency after foreclosure. For example, if the total amount owed on the mortgage is $250,000, and the fair market value of the property is $200,000, the deficiency would be $50,000. However, a borrower does not automatically owe this money to the lender. The lender must start a new lawsuit to collect the deficiency.
What is a Deficiency Judgment?
If there is a deficiency after a Sheriff Sale, it is possible for a lender to seek this amount from a borrower. In New Jersey, an action seeking a deficiency judgment must be a separate lawsuit filed by the lender. New Jersey Statute 2A:50-2, states that if the property is a primary residence, the lender must start the new lawsuit seeking the deficiency within three (3) months of the sheriff sale, or the confirmation of the sale if one is necessary. If it is a second home or investment property, the lender has a longer period to file an action for a deficiency. An experienced NJ foreclosure attorney can help you understand your rights and options for your specific case.
How Can I Avoid a Deficiency Judgment?
Currently, actions for deficiencies are not common. However, if you are concerned about a deficiency and you are defending the foreclosure, it is possible to reach a settlement with the lender in which they waive the right to pursue a deficiency. Additionally, if you receive a discharge from a Chapter 7 Bankruptcy that included the mortgage debt, the debt will be extinguished and there can be no action for a deficiency.
If you are facing a foreclosure and are concerned about a deficiency judgment, contact Ira J. Metrick today.