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, the lender is allowed to sue the homeowner to recover the deficiency. This means that borrowers may be saddled with a deficiency judgment for what can be a huge sum ($50,000 in the example above) following a foreclosure. Once the lender is granted 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.
Deficiency judgments are generally allowed in Kentucky. Ky. Rev. Stat. Ann. § 426.005. However, a personal judgment cannot be obtained against a borrower who is constructively summoned, and who does not appear in the action. Ky. Rev. Stat. Ann. § 454.165.
In Kentucky, 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. In 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 personal liability 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.