One of the big worries borrowers have after a foreclosure is whether or not the lender is entitled to a deficiency judgment. If the property sells for less than is owed to the lender at the foreclosure sale, the difference between the sales price and the total debt is known as the deficiency. 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 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 remaining debt by placing a lien on other property owned by the borrower, levying the borrower’s bank account, or garnishing the borrower’s wages. Not all states allow a lender to obtain a deficiency judgment. Read on to find out whether lenders may sue borrowers for the deficiency in Rhode Island.
Both judicial and nonjudicial foreclosures are allowed in Rhode Island, although most foreclosures are nonjudicial. R.I. Gen. Laws § § 34-27-1, 34-11-22. Under Rhode Island law, lenders may obtain a deficiency judgment after either a judicial or nonjudicial foreclosure.
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 is owed. A short sale occurs when a property is sold for less than is owed on the total mortgage debt and is usually completed as a way to avoid foreclosure. A short sale, by its very nature, falls short of paying off the lender in full. A deed in lieu of foreclosure may also result in a deficiency if the deed in lieu of foreclosure agreement clearly state that the transaction is not in full satisfaction of the debt. The balance remaining as a result of the short sale, as well as the difference between fair market value and the total debt in the case of a deed in lieu of foreclosure, is also considered a deficiency. There is nothing in Rhode Island’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 with a short sale or deed in lieu of foreclosure, the borrower must negotiate with the lender to reach a consensus that the transaction fully pays off the debt. Without such language in the written short sale or deed in lieu of foreclosure agreement, there remains a risk that the lender may later attempt to obtain a deficiency judgment against you.
The statutes that govern foreclosures in Rhode Island can be found in the Rhode Island General Laws, Sections 34-27-1 to 34-27-5. They can be found on the website of the State of Rhode Island General Assembly.