Pennsylvania is a judicial foreclosure state, meaning foreclosure cases are handled through the court system. The lender files a lawsuit against the borrower and obtains a judgment. As in most judicial foreclosure states, in Pennsylvania the lender may obtain a deficiency judgment, which is a money judgment for the difference between the amount the property is sold for at the foreclosure sale and the total mortgage debt.
In some judicial foreclosure states, the lender may obtain a deficiency judgment as part of the foreclosure lawsuit itself. In other states, the deficiency judgment must be obtained in a separate lawsuit that is filed subsequent to the foreclosure. In Pennsylvania, the lender must file a separate action to recover the deficiency after the completion of the foreclosure sale. 42 Pa. Cons. Stat. Ann § 8103[a]. The suit must be filed within six months following execution and delivery of the sheriff’s deed. 42 Pa.C.S. § 5522[b]. Once the deficiency judgment is obtained, the lender is entitled to collect the debt itself or it can sell the debt to a debt collection agency, which can then pursue the borrower for payment. Pennsylvania does not allow a creditor to garnish wages to collect on a consumer credit debt. However, once wages are deposited into a bank account, they are no longer considered wages, but rather are part of the account, and are fair game for garnishment.
If the lender is the purchaser of the property at the foreclosure sale, then the deficiency is limited by the fair market value of the property. 42 Pa. Cons. Stat. Ann §8103[a]. For example, if the mortgage debt is $200,000, and the lender bids $150,000 at the foreclosure sale and purchases the property, the deficiency is $50,000. Generally, this means the lender could file a subsequent lawsuit to recover the $50,000 deficiency. However, if the fair market value of the property is $175,000, then the lender could only obtain a deficiency judgment in the amount of $25,000 (the fair market value minus the foreclosure sale price). The goal of this limitation is to prevent a lender from making an artificially low bid in order to create a huge deficiency that it would then try to collect from the borrower. When the lender files its petition for a deficiency judgment, it must include in the petition what it believes is the fair market value of the property. If the borrower disputes this assessment, the court will evaluate the evidence and make a determination regarding the fair market value.
A short sale is a transaction in which a homeowner sells a property for less than is owed on the mortgage. The lender agrees to accept this “short” amount in exchange for releasing the mortgage lien. Unless the lender agrees to add a provision to the short sale agreement that states the transaction is in full satisfaction of the mortgage debt, the lender retains the right to the deficiency. However, this does not mean that the lender automatically gets a deficiency judgment against the borrower. The lender must file a lawsuit to be awarded the deficiency judgment. Many lenders may choose to avoid the cost of a lawsuit to recover the deficiency from an insolvent borrower. If you intend to complete a short sale and want to avoid the risk of being sued for the deficiency, you should get your lender to include language in your short sale agreement that you will no longer be liable for any deficiency after the closing of the short sale.
See also: Risks of a Short Sale
A deed in lieu of foreclosure (deed in lieu) is a transaction where the homeowner deeds the title to the property directly to the lender in exchange for the lender releasing the mortgage lien. In most instances, a deed in lieu will be in exchange for full satisfaction of the debt. However, it is possible that a deficiency could exist with a deed in lieu. If the deed in lieu documents clearly state that there is a deficiency, as well as the amount of a deficiency (the difference between the fair market value and the mortgage debt), this means that the borrower remains liable for the deficiency. To avoid a deficiency judgment after a deed in lieu, the borrower should negotiate with the lender and get in writing that the remainder of the debt is forgiven.
With both deeds and lieu and short sales, it is possible to negotiate a reduced deficiency or pay a lump sum settlement regarding any remaining debt associated with the transaction.