One of the big worries borrowers have following a foreclosure is whether or not their lender is entitled to a deficiency judgment. If the property sells at the foreclosure auction for a price that is less than the amount the borrower owes to the lender, the difference between the sales price and the total debt is known as the deficiency. For example, if the 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 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 debt by garnishing the borrower’s wages or levying a bank account.
Most home mortgages in Montana are trust indentures (also known as deeds of trust), which can be foreclosed nonjudicially (without a lawsuit). Mont. Code Ann. § § 71-1-301 et seq. Trust indentures may also be foreclosed judicially (with a lawsuit). Mont. Code Ann. § § 71-1-221 et seq.
A deficiency judgment is not allowed if:
When a home is sold in a short sale or when a deed in lieu of foreclosure is completed, the transaction likely will not satisfy the total amount that the borrower owes to the lender. A short sale occurs when a property is sold for less than is owed on the total mortgage debt and is usually completed by the borrower to avoid foreclosure. A short sale, by its very nature, falls short of paying off the lender in full; the balance remaining on the debt is the deficiency. In the case of a deed in lieu of foreclosure, the difference between the property’s fair market value and the total debt is also considered a deficiency. There is nothing in Montana’s statutes prohibiting a lender from suing a borrower for the deficiency after a short sale or deed in lieu of foreclosure.
To avoid a deficiency judgment, the borrower must negotiate with the lender to include language in the short sale or deed in lieu of foreclosure agreement language that the transaction fully pays off the debt. Without such language, there remains a risk that the lender may later attempt to obtain a deficiency judgment against the borrower.