Once a homeowner decides that a mortgage is no longer affordable and that it’s time to move on, the homeowner must generally choose from one of three options: allowing the home to be sold in foreclosure, selling the home in a short sale, or transferring title to the home directly to the lender with a deed in lieu of foreclosure. Whether the borrower sells the home through a short sale or the bank sells the home following a foreclosure or a deed in lieu of foreclosure, the final sale price may not be enough to cover the total amount that the homeowner owes to the bank. For example, if a homeowner owes $300,000 on a mortgage, and the home sells for only $250,000, there is a gap between the outstanding debt and the sale price of $50,000. This gap is called a deficiency.
Under certain circumstances, the lender may be able to sue the borrower to recover the deficiency. With a deficiency judgment from the court in hand, the lender has the right to garnish the borrower’s wages, freeze the borrower’s bank accounts, and place liens on the borrower’s other assets. The law on deficiency judgments varies greatly from state to state. Read on to find out whether deficiency judgments are allowed in South Dakota and under what conditions.
The most common method of foreclosure used in South Dakota is nonjudicial foreclosure, which allows lenders to foreclose outside of court by following a series of detailed procedural guidelines. South Dakota law does not prohibit lenders from obtaining a deficiency judgment following a nonjudicial foreclosure. However, if the lender purchases the property at the foreclosure auction, the amount of the deficiency judgment will be limited to the difference between the true market value of the property and the total debt. S.D. Codified Laws §21-48-14.
In judicial foreclosures, which require lenders to sue borrowers in court in order to foreclose, the lender must prove that the home sold for no less than its fair and reasonable value. If the lender can establish this fact, then it will be entitled to the full amount of the deficiency. S.D. Codified Laws §21-47-16.
South Dakota law provides for an alternate process to the standard deed in lieu of foreclosure called a voluntary foreclosure. In a voluntary foreclosure, the borrower transfers possession of the property directly to the lender and the lender forgoes its ability to obtain a deficiency judgment. S.D. Codified Laws §21-48A-1.
If the borrower sells the home through a short sale in order to prevent foreclosure, South Dakota law does not prohibit the lender from suing the borrower for the deficiency afterwards. If you’re interested in completing a short sale in South Dakota, you should negotiate with your lender for a release from any liability for the deficiency. To learn more about avoiding repaying a deficiency after a short sale, see our article How to Deal with a Short Sale Deficiency Judgment.
If the lender forgives all or a portion of the deficiency, the amount of the forgiven debt may be considered taxable income. However, under certain circumstances, forgiven debt may be excluded from taxable income. To learn more about the tax consequences of forgiven deficiency debt, see our article Income Tax Liability for Deficiencies.