Once a homeowner decides that a mortgage is no longer affordable and that it’s time to move on, the homeowner must generally choose from one of three options: allowing the home to be sold in foreclosure, selling the home in a short sale, or transferring title to the home directly to the lender with a deed in lieu of foreclosure. Whether the borrower sells the home through a short sale or the bank sells the home following a foreclosure or a deed in lieu of foreclosure, the final sale price may not be enough to cover the total amount that the homeowner owes to the bank. For example, if a homeowner owes $300,000 on a mortgage, and the home sells for only $250,000, there is a gap between the outstanding debt and the sale price of $50,000. This gap is called a deficiency.
Under certain circumstances, the lender may be able to sue the borrower to recover the deficiency. With a deficiency judgment from the court in hand, the lender has the right to garnish the borrower’s wages, freeze the borrower’s bank accounts, and place liens on the borrower’s other assets. The law on deficiency judgments varies greatly from state to state. Read on to find out whether deficiency judgments are allowed in Louisiana and under what conditions.
All foreclosures in Louisiana must go through the judicial system, requiring the lender to sue the borrower in court in order to foreclose. The most common method of judicial foreclosure in Louisiana is known as an executory proceeding. In an executory proceeding, a judgment of foreclosure is not required because the judgment has been confessed in advance by the borrower in the mortgage document itself. Instead, the lender petitions the court for a seizure of the property and following such seizure, the property is sold at auction by court order. La. Code Civ. Proc. Ann. arts. 2634, 2638. As an alternative to the executory proceeding, a lender in Louisiana may also foreclose through an ordinary proceeding, which follows the more traditional foreclosure procedure in which the lender is required to obtain a court judgment in order to foreclose. La. Code Civ. Proc. Ann. art. 3722.
In either type of judicial foreclosure proceeding, the court may grant a deficiency judgment for the full amount of any deficiency, provided that the property was appraised prior to the sale. La. Code Civ. Proc. Ann. art. 2771. In order to obtain a deficiency judgment, the lender must either convert an executory proceeding into an ordinary proceeding or file a separate suit for deficiency. La. Code Civ. Proc. Ann. art. 2772.
Lenders typically will waive their right to a deficiency after a deed in lieu of foreclosure. However, Louisiana law does allow a lender to obtain a deficiency judgment following a deed in lieu of foreclosure. The amount of the deficiency judgment is limited to the outstanding mortgage debt less the reasonably equivalent value of the property. There must be a written agreement in which the borrower waives the right to a judicial appraisal and sale, agrees to voluntarily transfer title to the property to the lender, agrees to a valuation of the property, and agrees that the lender may obtain a deficiency judgment for the difference between the outstanding mortgage debt minus the agreed upon value of the property. If the borrower has the property appraised for the purpose of determining the value of the property, the value assigned in the written agreement must be at least three-fourths of the appraised value. La. Rev. Stat. § 4108.2.
If the borrower sells the home through a short sale in order to prevent foreclosure, Louisiana law does not prohibit the lender from recovering the amount of the deficiency. However, borrowers may be able to negotiate more favorable terms while discussing the terms of their short sale with the lender; some lenders will agree to reduce or forgive the deficiency amount upon the completion of a short sale.
If the lender forgives all or a portion of the deficiency, the amount of the forgiven debt may be considered taxable income. However, under certain circumstances, forgiven debt may be excluded from taxable income. To learn more about the tax consequences of forgiven deficiency debt, see our article Income Tax Liability for Deficiencies.