A deficiency judgment is a court judgment entered against a borrower typically for the difference between the amount remaining due under the borrower’s mortgage loan and the amount the lender recovers in a foreclosure sale. In other words, if the borrower owes $200,000 on the mortgage, but the home is sold at a foreclosure auction for only $150,000, then the lender may secure a deficiency judgment against the borrower for the $50,000 difference. Whether your lender can sue you to recover this difference, also known as the deficiency, depends on the laws of your state.
Delaware allows lenders to sue borrowers to recover the deficiency after a foreclosure. A deficiency judgment can have serious consequences, such as wage garnishment or the freezing of bank accounts. Therefore, if you’re facing foreclosure in Delaware, it is important to understand the procedures and protections available to borrowers in Delaware.
Foreclosures in Delaware are judicial, meaning a lender must sue a delinquent borrower in court to foreclose. The lender may then file a separate lawsuit to recover the deficiency after the foreclosure. Del. Code Ann. Tit. 10, § 5002.
The amount of the deficiency judgment will generally be the difference between the outstanding loan amount and the high bid for the property at the foreclosure auction. If the borrower believes that the high bid is grossly disproportionate to the true value of the property, the borrower can ask the court to set aside the sale or limit the amount of the deficiency judgment. Girard Trust Bank v. Castle Apartments, Inc., 379 A.2d 1144 (Del. 1977).
A short sale occurs when a borrower secures permission from the lender to sell the property for less than the outstanding loan amount. Because the borrower is selling the property for less than the amount owed, there is a deficiency by definition.
Nothing in Delaware’s foreclosure laws prohibit a lender from suing a borrower for a deficiency after the closing of a short sale. A borrower pursuing a short sale should negotiate with the lender to include language in the short sale agreement releasing the borrower from liability for any deficiency that remains after the closing of the short sale.
In a deed in lieu of foreclosure, the borrower gives up all rights to the property and signs over the deed to the lender; in exchange, the lender releases the borrower from all obligations under the mortgage. There is no foreclosure. The lender simply takes title to the property, and the borrower walks away.
Although in the past, deed in lieu of foreclosure transactions typically included a release of the borrower from all obligations under the mortgage, there is nothing in Delaware’s foreclosure laws prohibiting a lender from suing a borrower for a deficiency after a deed in lieu of foreclosure. If you’re hoping to complete a deed in lieu of foreclosure, you should negotiate with your lender to include in your deed in lieu of foreclosure agreement a release from all mortgage obligations.