One of the big worries borrowers have after a foreclosure is whether or not the lender is entitled to a deficiency judgment. If the property sells for less than is owed to the lender at the foreclosure sale, the difference between the sales price and the total debt is known as the deficiency. In some states, the lender is allowed to sue the homeowner for this difference and obtain a deficiency judgment, which is a personal court judgment against the borrower. The deficiency judgment allows the lender to collect the remaining debt after the foreclosure has been completed by doing things such as placing a lien on other property owned by the borrower or garnishing the borrower’s wages. Not all states allow a lender to obtain a deficiency judgment. Read on to find out whether lenders may sue borrowers for the deficiency following a foreclosure in Alabama.
Alabama is primarily a nonjudicial foreclosure state, which means that most foreclosures are processed outside of the court system with no judicial oversight. Since nonjudicial foreclosures proceed without court intervention, the foreclosure process tends to be expedited. In fact, in Alabama a foreclosure can be completed in as little time as thirty to sixty days. Under Alabama law, lenders may sue borrowers to obtain a deficiency judgment after the foreclosure.
At the foreclosure auction, the lender can credit bid up to the amount of the total debt without having to put up any cash. There is no requirement in Alabama that the lender’s bid be equal to or greater than the total debt. However, lenders do owe borrowers a duty of fairness and good faith in coming up with a bid price. This means that lenders can’t offer an unreasonable bid far below the fair market value of the property for the purpose of pursuing a large deficiency judgment against the borrower.
If the lender or a third-party purchaser bids less than the total debt, then the debt is not fully satisfied and the lender may seek a deficiency judgment for the difference. See Wood River Dev., Inc. v. Armbrester, 547 So. 2d 844 (Ala. 1989).
When a home is sold by a short sale or when a deed in lieu of foreclosure is completed, the transaction likely will not satisfy the total amount that is owed. A short sale occurs when a property is sold for less than is owed on the total mortgage debt and is usually completed as a way to avoid foreclosure. A short sale, by its very nature, falls short of paying off the lender in full. A deed in lieu may also result in a deficiency if the documents clearly state that the transaction is not in full satisfaction of the debt. The balance between the short sale amount, as well as the difference between fair market value and the total debt in the case of a deed in lieu, is also considered a deficiency.
To avoid a deficiency judgment with a short sale or deed in lieu of foreclosure, the borrower must negotiate with the lender to reach a consensus that the transaction fully pays off the debt. The written agreement should also expressly state that the debt is completely satisfied. Without language in the agreement indicating that the transaction satisfies the debt, there remains a risk that the lender may later attempt to obtain a deficiency judgment against the borrower.
If the lender refuses to agree that the short sale or deed in lieu of foreclosure fully satisfies the debt, the borrower can always negotiate a reduced deficiency amount or repayment plan, or take the chance the lender may never actually file a suit to obtain a deficiency judgment. If the lender does obtain a deficiency judgment, the obligation may be discharged by filing for bankruptcy. (For more on discharging deficiency debts in bankruptcy, see our article How Are Deficiency Judgments Collected?)
The statutes that govern nonjudicial foreclosures in Alabama can be found at Alabama Code Title 35, Chapter 10 (starting at Section 35-10-11). Alabama Code Sections 35-10-50 and 35-10-51 cover deeds in lieu of foreclosure. More information can be found on the Alabama Legislative Information System Online website.