One of the biggest worries that borrowers have about a foreclosure is whether or not they will still owe money to the lender, even after the lender takes possession of the property. The answer to this question depends on whether or not their state’s laws permit deficiency judgments. A deficiency judgment is a personal judgment against the borrower for the difference between the proceeds from a foreclosure sale and the total mortgage debt.
In Oklahoma, the foreclosure may be judicial or nonjudicial, and lenders are legally allowed to obtain a deficiency judgment after either type of foreclosure. With judicial foreclosures, the lender must request the deficiency judgment simultaneously with the making of a motion for an order confirming the foreclosure sale or within 90 days of the foreclosure sale. The maximum amount allowed for the deficiency judgment is the difference between the total debt and the fair market value of the property or the difference between the total debt and the foreclosure sale price, whichever is less. Okla. Stat. Tit. 12, § 686.
For nonjudicial foreclosures, a deficiency judgment will not be permitted if the borrower sends written notice to the lender by certified mail at least ten days before the foreclosure sale that the property is the borrower’s homestead and that the borrower elects against a deficiency judgment. Okla. Stat. Tit. 46, § 43(A)(2)(c). If the property is not a homestead, then the borrower is liable for the deficiency. The lender must bring an action for the deficiency within 90 days of the foreclosure sale and the maximum amount allowed for the deficiency judgment is the difference between the total debt and the fair market value of the property or the difference between the total debt and the foreclosure sale price, whichever is less. Okla. Stat. Tit. 46, § 43(A)(2)(d).
There is no Oklahoma law prohibiting a lender from recovering a deficiency judgment after a short sale or deed in lieu of foreclosure. A short sale is a transaction that involves selling a property for less than the balance that is owed to the lender. The lender agrees to accept this lesser amount and release its mortgage lien. Any unpaid balance is the deficiency. Whether or not the lender will be able to collect the deficiency will depend on the terms of the short sale agreement. Often, short sale agreements do not release borrowers from the obligation to pay the deficiency. Some states, such as California, require lenders to waive the deficiency if they agree to accept a short sale; however, Oklahoma does not have an analogous law. To avoid a deficiency, the borrower must negotiate a waiver of the deficiency. Without a deficiency waiver in the short sale agreement, the lender may be allowed to later file suit to obtain a deficiency judgment.
Deeds in lieu of foreclosure are generally presumed to be in full satisfaction of the debt. Yet, as more and more lenders look for ways to recoup losses, it is possible that the deed in lieu of foreclosure agreement could be structured in such a way that leaves the borrower responsible for any deficiency.
If the lender refuses to waive the deficiency with a short sale or deed in lieu of foreclosure, the borrower can always negotiate to pay a reduced lump sum settlement or pay the deficiency over a period of time. Or the borrower could take the chance that the lender may never actually file a suit to obtain a deficiency judgment. Once a deficiency judgment is obtained by the lender, however, bankruptcy may be the only way for the borrower to eliminate the debt. A successful Chapter 7 bankruptcy may totally discharge the deficiency debt, while a Chapter 13 bankruptcy will usually require that the borrower pay a portion of the owed amount.
The statutes governing deficiency judgments in Oklahoma can be found in Title 12, Section 686 and Title 46, Section 43 of the Oklahoma Statutes, which you can view on the website of the Oklahoma State Legislature at www.oklegislature.gov/osStatuesTitle.aspx.