Foreclosures in Indiana are judicial, meaning they are handled through the court system. Nonjudicial foreclosures are not allowed in the state since the Indiana Code specifically requires that all foreclosures go through a judicial proceeding. Ind. Code § 32-29-1-3. The foreclosure lawsuit will be filed in the circuit court in the county where the property is located. Ind. Code § 32-30-10-3. There is a mandatory waiting period between the filing of the lawsuit and the foreclosure sale. The waiting period is:
- three months for mortgages signed on or after July 1, 1975
- six months for mortgages signed on or after January 1, 1958, but before July 1, 1975; and
- twelve months for mortgages signed before January 1, 1958. Ind. Code § 32-29-7-3.
For most borrowers, this means that the sale cannot take place until three months after the foreclosure lawsuit has been filed. There are two exceptions:
- the property was abandoned and is residential, or
- the borrower waives the waiting period with the consent of the lender. Ind. Code §§ 32-29-7-3[a], 32-29-7-5.
Deficiency Judgment After Foreclosure
In Indiana, there is a very good reason for borrowers to consider waiving the foreclosure waiting period. If the borrower obtains the consent of the lender and waives the waiting period then, by law, the lender cannot sue for a deficiency judgment. Ind. Code § 32-29-7-5. The waiver is filed with the clerk of the court and allows the foreclosure to proceed immediately.
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. For example, if the homeowner owes $200,000 to the lender and the property sells at the foreclosure sale for only $150,000, the lender is entitled to get a deficiency judgment against the homeowner for the $50,000 difference. But if the borrower agreed to waive the waiting period, then the lender cannot later sue the borrower for the remaining $50,000.
If the lender obtains a deficiency judgment, the lender can collect the deficiency by garnishing the borrower’s wages, freezing the borrower’s bank accounts, and seizing the borrower’s nonexempt assets. The lender can also sell the deficiency judgment to a debt collector or debt purchaser, who will then attempt to collect the deficiency from the borrower. Avoiding a deficiency judgment is incentive for Indiana homeowners to waive the time limit and advance with the foreclosure without delay.
Deficiency Judgment After Short Sale and Deed in Lieu of Foreclosure
In Indiana, a lender may obtain a deficiency judgment following a short sale or deed in lieu of foreclosure (deed in lieu). Short sales and deeds in lieu of foreclosure do not always relieve borrowers of the entire debt. A short sale, by its very nature, falls short of paying off the lender in full. A deed in lieu may also show a deficiency if it clearly states that the borrower remains liable for the difference between the fair market value of the property and the total debt. Since these transactions are not foreclosures, the Indiana statute that allows borrowers to waive the waiting period and eliminate the possibility of a deficiency judgment does not apply.
To eliminate the possibility of a deficiency judgment following either a short sale or deed in lieu, the borrower must bargain with the lender for the transaction to be considered a complete payoff of the debt. The documents, either the short sale agreement or the deed in lieu documents, must expressly state that the debt 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 negotiate a reduced deficiency or offer to pay a lump sum settlement to resolve the deficiency.
For More Information
If you want more information about the laws that govern Indiana foreclosures, go to the Indiana Code, Title 32 (Property), Article 29 (Mortgages), Chapter 7 (Foreclosure, Redemption, Sale, Right to Retain Possession).