Anti-Deficiency Laws

In the context of a foreclosure, a "deficiency" is the difference between what a borrower owes on a mortgage loan and the price at which the house is sold at a foreclosure sale. Many states allow the bank to get a personal judgment, called a "deficiency judgment," for this amount against the borrower. An "anti-deficiency law" is a state statute (law) that prohibits foreclosing banks from suing borrowers for deficiency judgments.

In this article, you'll find general information about deficiency judgments, anti-deficiency laws, and get a brief summary about these laws in each state.

What Is a Deficiency Judgment?

A "deficiency judgment" is a money judgment against a borrower for the difference between the total amount of the mortgage debt and the foreclosure sale price.

Example. Suppose you owe the bank $450,000 on your mortgage loan. Your home sells at a foreclosure sale for $400,000. The deficiency is $50,000. Then, if state law allows it, the bank may get a personal judgment against you for $50,000.

How Are Deficiency Judgments Collected?

Once the bank has a deficiency judgment, it may try to collect this amount from you using regular collection methods, like garnishing your wages, levying your bank account, or placing a lien on other property you own.

Does Your State Allow Deficiency Judgments?

Most states allow banks to go after borrowers for deficiency judgments. In judicial foreclosures, the bank can usually request the judgment as part of the foreclosure lawsuit. Some states, however, require the bank to file a separate action to recover the deficiency. With a nonjudicial foreclosure, the bank must sue the borrower following the foreclosure to get a deficiency judgment.

Many States Limit the Deficiency Amount

Many states that allow banks to seek deficiency judgments limit the amount that banks can recover to the difference between the outstanding loan amount and the home's fair market value. For example, again, say the amount you owe on your mortgage loan is $450,000. The property sells in a foreclosure sale for $400,000. But the fair market value of the house is $425,000. In a deficiency lawsuit, assuming your state has this kind of law, the bank could recover only $25,000 ($450,000 minus $425,000), even though the deficiency was actually $50,000 ($450,000 minus $400,000).

Some States Have Anti-Deficiency Laws That Prohibit Deficiency Judgments

Other states, however, have anti-deficiency laws. These laws prohibit lenders from suing for deficiencies under certain circumstances, like after a nonjudicial foreclosure. Loans that fit in this category are sometimes called "nonrecourse" loans.

What About Second Mortgages and Other Property Loans?

Anti-deficiency laws typically provide no protection for second or third mortgages, home equity lines of credit, and mortgages secured by vacation or investment properties.

Will Your Bank Sue You for the Deficiency?

Even if your bank has the right to sue you for a deficiency, it might not do so. Lawsuits can be costly, and many borrowers losing their homes to foreclosure have little income and few assets for the bank to go after.

But if you have a job or assets, you could face such a lawsuit. If you live in a state that allows deficiency judgments, and you've been thinking about filing for bankruptcy for other reasons, you might be able wipe out your liability to repay any deficiency. For more information about whether bankruptcy might be right for your situation, talk to a bankruptcy lawyer.

Look Out for Legal Changes

In the chart below, you'll find a summary of whether a deficiency judgment is allowed in (or after) the most commonly-used foreclosure procedure for a particular state. Statutes change, though, so checking them is always a good idea. How courts and agencies interpret and apply the law can change too. These are just some of the reasons to consider consulting an attorney if you're facing a foreclosure.

Also, the chart is intended for owners of single-family residences and doesn't address special laws for agricultural land. The chart doesn't cover whether a deficiency judgment is allowed in another type or foreclosure, like in a judicial foreclosure if foreclosures in the state are typically nonjudicial, or any restrictions, such as whether the judgment is limited to the difference between the outstanding debt and the property's fair market value, or whether state law provides a time limitation for getting a deficiency judgment.

State Deficiency Judgment Laws

Talk to a Foreclosure Lawyer

As you can see, deficiency judgment laws vary widely from state to state and can be complex. If you're facing a foreclosure, it's important to understand how the law works in your state. To find out more, consider talking to a knowledgeable foreclosure lawyer.