A deficiency judgment is a judgment entered against a borrower typically for the difference between the amount remaining due under the borrower’s mortgage loan and the amount the lender recovers in a foreclosure sale. In other words, if the borrower owes $200,000 on the mortgage, but the home is sold at a foreclosure auction for only $150,000, then the lender may secure a deficiency judgment against the borrower for the $50,000 difference.
South Carolina allows lenders to sue borrowers to recover the deficiency as part of a foreclosure. A deficiency judgment can have serious consequences, such as wage garnishment or the freezing of bank accounts. Therefore, if you’re facing foreclosure in South Carolina, it is important to understand the procedures and protections available to borrowers in South Carolina.
Foreclosures in South Carolina are judicial, meaning a lender must sue a delinquent borrower in court to foreclose. A lender intending to pursue a deficiency judgment must do so as part of the foreclosure lawsuit. A borrower may determine whether or not the lender is seeking a deficiency judgment typically by looking at the complaint–the document the lender filed with the court and served on the borrower to initiate the foreclosure lawsuit. The complaint should contain language that indicates the lender is either waiving or reserving the right to a deficiency judgment. If the lender waives the right to a deficiency judgment, the lender cannot later sue the borrower to recover the deficiency. S.C. Code Ann. § 29-3-660; S.C. Rules Civ. Proc. Rule 71(b).
The deficiency will be the difference between the outstanding loan amount and the high bid for the property at the foreclosure auction. Unless the borrower applies to the court for an appraisal of the property (discussed in “Appraisal Rights,” below), the court will enter a judgment against the borrower for that amount. S.C. Code Ann. § 29-3-660.
If the borrower is unhappy with the high bid for the property, the borrower may apply to the court for an appraisal of the property. S.C. Code Ann. § 29-3-680. The appraisers will assign a fair market value to the property, and the court will deduct this value, in lieu of the high bid, from the outstanding balance of the mortgage loan to determine the deficiency. S.C. Code Ann. § § 29-3-720, 29-3-740.
A short sale occurs when a borrower secures permission from the lender to sell the property for less than the outstanding loan amount. Because the borrower is selling the property for less than the amount owed, there is a deficiency by definition.
Nothing in South Carolina’s foreclosure laws prohibit a lender from suing a borrower for a deficiency after the closing of a short sale. A borrower pursuing a short sale should negotiate with the lender to include language in the short sale agreement releasing the borrower from liability for any deficiency that remains after the closing of the short sale.
In a deed in lieu of foreclosure, the borrower gives up all rights to the property and signs over the deed to the lender; in exchange, the lender releases the borrower from all obligations under the mortgage. There is no foreclosure. The lender simply takes title to the property, and the borrower walks away.
Although in the past, deed in lieu of foreclosure transactions typically included a release of the borrower from all obligations under the mortgage, there is nothing in South Carolina’s foreclosure laws prohibiting a lender from suing a borrower for a deficiency after a deed in lieu of foreclosure. If you’re hoping to complete a deed in lieu of foreclosure, you should negotiate with your lender to include in your deed in lieu of foreclosure agreement a release from all mortgage obligations.