A deficiency is the amount that remains if the proceeds from a foreclosure sale do not pay off the entire mortgage debt. For example, if a homeowner owes $250,000 to the lender and the property sells at the foreclosure sale for only $200,000, the deficiency is $50,000.
In some states, including Kansas, the lender is allowed to sue the homeowner to recover the deficiency after the foreclosure. Once the lender obtains a deficiency judgment from the court, the lender can try to collect the judgment by garnishing the borrower’s wages or levying the borrower’s bank accounts.
Foreclosures in Kansas are judicial, meaning they are handled through the court system. The lender files a lawsuit against the borrower, obtains a judgment, and holds a foreclosure sale. Subsequent to the sale, the court will file an order confirming sheriff's sale, which recites the winning bid amount, winning bidder, and the amount of the deficiency, if any. The court may refuse to confirm the sale if the bid was substantially inadequate, although a sale for the full amount of the judgment (including taxes, interest, and costs) is considered adequate. Kansas Stat. Ann. § 60-2415(b).
The petition for foreclosure is served to the borrowers typically either by personal service (a sheriff or process server personally hands the borrower a copy of the petition) or by posting and mailing. If personal service cannot be completed, the petition will be posted on the property and notice of the posting will be mailed. Kansas Stat. Ann. § 60-303. However, if service is not accomplished in either of these ways, then notice must be published in a newspaper in the county where the petition is filed once a week for three consecutive weeks. Kansas Stat. Ann. § 60-307(d). If service is by publication only, then a deficiency judgment is not allowed. Kansas Stat. Ann. § 60-307(b). However, a deficiency judgment is allowed if the borrower submits to the jurisdiction of the court—by filing an answer to the petition, for example.
In Kansas, there is no law prohibiting a lender from obtaining a deficiency judgment following a short sale or deed in lieu of foreclosure. Short sales and deeds in lieu of foreclosure almost always result in a deficiency. In a short sale, the borrower sells the home for less than the outstanding mortgage debt with the lender’s permission. With a deed in lieu of foreclosure, the borrower signs over ownership of the home to the lender, and the lender agrees to release the borrower from its obligations under the mortgage.
If you hope to complete a short sale or deed in lieu of foreclosure and want to avoid a deficiency judgment, you need to negotiate with your lender to include in the short sale or deed in lieu of foreclosure agreement language releasing you from all mortgage obligations after the closing of the transaction. Without this language, the lender may attempt to obtain a deficiency judgment at some point in the future. If your lender refuses to release you from liability for the deficiency and is later awarded a deficiency judgment, your lender may be willing to negotiate a reduced lump sum payment or a payment plan.
To read the laws that govern Kansas foreclosures, you can find the Kansas Statutes on the website of the Kansas Legislature at http://kslegislature.org/li/b2011_12/statute/.