Massachusetts Laws on Post-Foreclosure Deficiency Judgments

Homeowners who lose their property in a foreclosure in Massachusetts may be liable for any mortgage deficiency.

In Massachusetts, the most common foreclosure process is nonjudicial. This means the lender may foreclose without any court action so long as the mortgage contains a power of sale clause. And after the foreclosure sale, the lender may obtain a deficiency judgment.

A deficiency occurs when the foreclosure sale doesn’t produce sufficient funds to pay the mortgage debt in full. The amount of the deficiency is the difference between the amount of the mortgage debt and the foreclosure sale price. A deficiency judgment is a judgment that the lender may obtain, giving the lender the right to collect the deficiency from the borrower.

Deficiency Judgments Following Foreclosure

In Massachusetts, in order for a lender to obtain a deficiency judgment, a Notice of Intent to Foreclose and of Deficiency After Foreclosure of Mortgage must be mailed to the borrower at least 21 days prior to the sale if a deficiency judgment is sought. Mass. Gen. Laws ch. 244, § 17B.

The notice must be mailed, postage prepaid, by registered mail with return receipt requested, to the borrower at his or her last known address. The notice must include a warning of liability for the deficiency and must be in substantially the format that is provided in Massachusetts General Laws, Chapter 244, Section 17B. The lender must also sign and swear to an affidavit regarding the mailing of the notice within 30 days after the foreclosure sale. Mass. Gen. Laws ch. 244, § 17B.

To obtain the deficiency judgment, the lender must file a lawsuit against the borrower following the foreclosure. The deficiency lawsuit must be commenced within two years of the date of the foreclosure. Mass. Gen. Laws ch. 244, § 17A. The lender then has 20 years to collect the judgment; the judgment will be presumed satisfied after 20 years have passed. Mass Gen. Laws ch. 260, § 20.

The bottom line is that a lender may obtain a deficiency judgment and collect the deficiency amount in Massachusetts if all of the following criteria are met:

  • A notice of intent to seek a deficiency was mailed to the borrower at least 21 days before the foreclosure sale.
  • An affidavit attesting that the notice was mailed was signed and sworn by the lender within 30 days after the foreclosure sale.
  • The action to obtain the deficiency judgment is initiated within two years following the foreclosure sale date.
  • The lender collects the debt within 20 years of obtaining the deficiency judgment.

If the lender does not adhere to these requirements, then the right to pursue a deficiency judgment, and the right to collect on it, is waived.

Deficiency Judgment Following Short Sale

A short sale occurs when the borrower, with the lender’s approval, sells a property at a price that is less than the amount owed on the mortgage. In Massachusetts, after a short sale, the lender can choose to do one of the following two things about the deficiency:

  1. The lender may opt to forgive the deficiency amount and issue to the borrower a Form 1099-C (Cancellation of Debt), which reports the deficiency as taxable income to the IRS.
  2. The lender may refuse to forgive that part of the debt that has not been covered by the sales price and retain the right to file a court action to obtain a deficiency judgment.

If you’re thinking about completing a short sale in Massachusetts, you should negotiate with your lender to have the deficiency forgiven. Make sure to get the waiver of deficiency in writing. See this article on the risks of doing a short sale for more information.

Deficiency Judgment Following Deed in Lieu of Foreclosure

Generally with a deed in lieu of foreclosure (deed in lieu), the entire debt is forgiven. However, if the lender wishes to preserve its right to a deficiency following a deed in lieu transaction, Massachusetts law does not prohibit it from doing so. In order for the lender to preserve its right to seek a deficiency judgment, the deed in lieu agreement would need to specifically state that the consideration is for less than a full satisfaction of the debt. Then the lender has the right to pursue a deficiency judgment against the borrower after the deal is completed. As with a foreclosure, the lender has two years to pursue a deficiency judgment and 20 years to collect it following a short sale or deed in lieu.

How to Reduce or Avoid a Deficiency Judgment

Keep in mind that simply because a lender has the right to pursue a deficiency judgment following a foreclosure, short sale, or deed in lieu, that does not mean that the lender necessarily will do so. Moreover, it may be possible to negotiate a reduced deficiency or a lump sum payment in satisfaction of the deficiency while negotiating the terms of the short sale or deed in lieu. Furthermore, the deficiency judgment can be eliminated or reduced by filing bankruptcy and having that debt discharged.

For More Information

Massachusetts’ foreclosure statutes are located in Part III, Title III, Chapter 244, of the General Laws of Massachusetts.

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