After a borrower’s home is lost through foreclosure, short sale, or deed in lieu of foreclosure, there will likely be a deficiency balance remaining on the borrower’s mortgage loan. A deficiency balance occurs when the home that is sold pursuant to a foreclosure, short sale, or deed in lieu of foreclosure sells for less than what the borrower owes on the loan.
Some states allow lenders to sue borrowers to recover the deficiency. If the lender wins the deficiency lawsuit, the court issues a deficiency judgment, which imposes personal liability on the borrower for the deficiency balance. Read on to find out whether and when Georgia allows deficiency lawsuits.
Deficiency Judgments After Foreclosure
The primary method of foreclosure used in Georgia is nonjudicial foreclosure. If the borrower’s mortgage contains a power of sale clause, the lender can foreclose upon the borrower’s property without having to sue the borrower and obtain a court order.
Although the lender can avoid having to go to court to foreclose upon the property, the lender must seek judicial intervention if it wants a deficiency judgment against the borrower. The process of acquiring a deficiency judgment is as follows:
- Within 30 days of the foreclosure sale, the lender must report the sale to the court.
- The lender must prove to the court that the borrower’s property was sold for a fair and reasonable price, or its true market value.
- At a court hearing, the borrower will have the opportunity to present evidence that the property was not sold for its true market value. Additionally, the borrower will have the opportunity to present evidence that the foreclosure process was defective or illegal. Ga. Code Ann. § 44-14-161.
If the court is satisfied that the property sold for its true market value, and that the foreclosure process was not defective or illegal, the court will confirm the foreclosure sale. The lender will then be able to file suit for a deficiency judgment against the borrower. If the sale was not proper, the court may order a resale of the property
Deficiency Judgments After Short Sale and Deed in Lieu of Foreclosure
In Georgia, there is no statutory procedure that the lender must follow to obtain a deficiency judgment after the borrower’s property is sold in a short sale or deed in lieu of foreclosure transaction. But neither is there a prohibition against the lender suing the borrower for the deficiency after a short sale or deed in lieu of foreclosure.
In the case of a short sale and deed in lieu of foreclosure, the borrower’s property will invariably sell for less than what the borrower owes on the mortgage loan. While negotiating the terms of the short sale or deed in lieu of foreclosure agreement, the borrower should request that the agreement include language that the lender will forego seeking a deficiency judgment against the borrower after the closing of the transaction. If the lender refuses to include such language, the borrower will need to weigh the benefits of completing a short sale or deed in lieu of foreclosure against the risk of being sued for the deficiency.
For more on deficiency judgments, including advice on what you can do if you can’t pay the deficiency, see our articles Income Tax Liability for Deficiencies and How Are Deficiency Judgments Collected?