In many states, if the sale price at a foreclosure sale fails to fully satisfy the mortgage debt, a lender can obtain a deficiency judgment against the borrower. (A deficiency is the difference between the amount the property is sold for at the foreclosure sale and the total mortgage debt, whereas a deficiency judgment is the personal court judgment against the borrower for the amount of the deficiency.) In the past, deficiency judgments were rare after a foreclosure. These days, however, because of the distressed real estate market, lenders are more likely to pursue deficiency judgments if allowed by state law. Read on to find out whether deficiency judgments are allowed in West Virginia and under what circumstances.
Deficiency judgments are allowed in West Virginia. Foreclosures are typically nonjudicial, which means they are administered without court supervision, although judicial foreclosures are also allowed. To obtain a deficiency judgment in a judicial foreclosure, the lender must seek the deficiency in the same lawsuit as the foreclosure. With nonjudicial foreclosures, the lender may obtain a deficiency judgment by means of filing a separate suit after the conclusion of the nonjudicial foreclosure. The deficiency lawsuit is brought in the same manner as any other civil action in West Virginia.
Debtors often seek to complete a short sale or deed in lieu of foreclosure as a way to avoid a foreclosure. A short sale occurs when a property is sold for less than is owed on the total mortgage debt with the lender’s permission. A short sale, as its name implies, falls short of paying off the lender in full. The difference between the short sale amount and the total debt is the deficiency. See Risks of a Short Sale for more information.
A deed in lieu of foreclosure is a transaction where the homeowner deeds the title to the property to the lender in exchange for the lender releasing the borrower from its obligations under the mortgage. In most instances, a deed in lieu of foreclosure will be in exchange for full satisfaction of the debt. However, a deed in lieu of foreclosure may result in a deficiency if the documents clearly state that the transaction is not in full satisfaction of the debt. In this case, the difference between the home’s fair market value and the total debt is then considered a deficiency.
There is nothing in West Virginia’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, the borrower must negotiate with the lender to reach a consensus that the transaction fully pays off the debt. The written short sale or deed in lieu of foreclosure agreement should expressly state that the debt is completely satisfied. Without a deficiency waiver in the agreement, there remains the risk that the lender may later attempt to obtain a deficiency judgment.
If the lender refuses to waive the deficiency, the borrower can always negotiate to pay a reduced lump sum settlement or pay the deficiency off over time. The borrower could also take the chance that the lender may never actually file a lawsuit to obtain a deficiency judgment. Once the lender obtains a deficiency judgment, the borrower may have the deficiency debt eliminated by filing bankruptcy. (For more on eliminating deficiency debts in bankruptcy, see our article How Are Deficiency Judgments Collected?)
The laws that govern West Virginia’s nonjudicial foreclosures can be found in the West Virginia Code, Sections 38-1-3 through 38-1-15, and can be accessed on the website of the West Virginia Legislature at www.legis.state.wv.us/WVCODE/Code.cfm.