Florida was one of the states hit hardest in the recent economic downturn. Property values were reduced to amounts far below many mortgage debt balances. That reduction in value is what lenders seek to recoup when they pursue a deficiency judgment as part of the foreclosure process. A deficiency judgment is the monetary amount that the borrower is personally liable to pay if the proceeds from a foreclosure sale do not cover the entire debt.
Deficiency Judgments After Foreclosure
A foreclosure does not automatically create a deficiency judgment in the state of Florida. The lender must request the deficiency judgment after a judgment of foreclosure is entered. The lender files a motion with the court following the foreclosure sale. The court must hold a separate evidentiary hearing on this request during which the lender must demonstrate that the property’s value on the sale date was less than the note balance. The borrower can refute this by offering the results of an appraisal or showing that the assessor’s taxed value is more than the note balance. Ultimately, though, the court has discretion as to whether or not to award a deficiency judgment. Moreover, if the property was worth more than note balance on the sale date, then a deficiency judgment will not be permitted. However, once the judge signs the order granting the motion for a deficiency judgment, the borrower is responsible to repay that debt.
Effective July 1, 2013, the period of time in which the lender may seek a deficiency judgment was reduced from five years to one year for residential properties with no more than four dwelling units. The claim for a deficiency in a foreclosure action does not arise until the foreclosure sale has been completed so this means that the one-year time frame starts at the time of the foreclosure sale.
Promissory Notes and Mortgages
When you take out a loan to purchase a property, there are two documents that will be signed: the promissory note and a mortgage. The promissory note is the promise to pay the debt. The mortgage is the document that pledges the parcel of property as security for that debt. In Florida, a deficiency judgment is available following a foreclosure sale if personal service was obtained on the borrowers--that is, those persons who signed the promissory note. A process server or a law enforcement agent must personally serve a copy of the complaint for foreclosure, summons, and lis pendens (the document that is recorded in the county records as notice that a lawsuit has been filed against the property) on the borrowers in order to obtain the deficiency judgment.
Who is Most at Risk?
Homeowners who are financially secure but chose to strategically default, or “walk away,” because their property lost so much value are at the most risk of deficiency judgments. In making the decision whether or not to move for a deficiency judgment, lenders may pull a borrower’s credit report to see if the borrower strategically defaulted. If all of the borrower’s other debts are paid up to date, then the lender can be reasonably certain that there was a strategic default and they are much more likely to pursue the deficiency judgment.
Once the deficiency judgment is obtained, the bank can file that judgment in the public records and that creates a lien against any other real property owned by the borrower. Another possibility is that once the lender obtains a deficiency judgment, it may sell that deficiency judgment to a collection agency. While lenders may not want to take the time to track down borrowers to collect payment for the deficiency judgment, collection agencies have extensive resources to pursue borrowers and attempt to collect on those debts.
Deficiency Judgments After Short Sales and Deeds in Lieu of Foreclosure
Deficiency judgments may occur following short sales and deeds in lieu of foreclosure in Florida as well. Short sales and deeds in lieu of foreclosure always involve a release of the lien created by the mortgage, but they will not always result in a complete satisfaction of the promissory note. To eliminate the possibility of a deficiency following these actions, the borrower must take careful steps to negotiate that the transaction is in full satisfaction of the debt when dealing with the lender. The documents must expressly state that part of the consideration for the short sale or deed in lieu of foreclosure is that the promissory note is satisfied in full. Without this language, the lender may attempt to obtain a deficiency judgment at some point in the future. If the lender refuses to agree to a full satisfaction of the debt, the borrower can always offer to repay a smaller portion of the debt and negotiate a new promissory note for that amount.
For More Help
If you are facing the possibility of a deficiency judgment in Florida, it would likely be beneficial to hire an experienced attorney who can defend against the deficiency, negotiate a settlement so that the deficiency is minimized, or assist in arranging a short sale or deed in lieu of foreclosure that is in full satisfaction of the debt. For more information on Florida deficiency judgments, refer to Florida Statutes Annotated, Sections 702.06 and 45.031(8).