If you lose your home to foreclosure in New Jersey, your liability for the mortgage debt might not end when the lender sells the property to a new owner at a foreclosure sale. If the property sells for less than you owe the lender, you just might get stuck with a hefty bill in the form of a deficiency judgment.
A "deficiency judgment" is a money judgment for the difference between the total mortgage debt and foreclosure sale price. The deficiency judgment allows the lender to collect the debt through regular collection methods, like garnishing your wages or levying your bank account.
In some states that use judicial foreclosure procedures, the lender can get a deficiency judgment as part of the foreclosure lawsuit itself. In other places, the lender has to seek a deficiency judgment by filing a separate lawsuit after the foreclosure.
New Jersey foreclosures are judicial. The lender files a lawsuit against the borrower and obtains a judgment from the court. As in most judicial foreclosure states, in New Jersey, the lender may obtain a deficiency judgment against a borrower. To get a deficiency judgment, the lender must file a separate lawsuit within three months after the foreclosure sale or, if confirmation of the sale is required, from the date of the sale's confirmation. (N.J. Stat. Ann. §§ 2A:50-2, 2A:50-2.1).
If the lender files a lawsuit against you for a deficiency judgment, and you think the home sold for less than its fair market value at the foreclosure sale, you may dispute the amount of the deficiency by answering the lender's suit. You'll need to include evidence regarding the property's actual value. The court will then determine the property's value and figure the amount of the deficiency by subtracting the home's fair market value as of the sale date from the outstanding debt. (Or, the parties may agree to hire three appraisers, and the court will accept their determination about the home's fair market value.) (N.J. Stat. Ann. § 2A:50-3).
However, if you challenge the deficiency amount, you'll lose your right of redemption. (N.J. Stat. Ann. § 2A:50-5). Generally, if the lender gets a deficiency judgment, you get six months after the judgment to bring an action to redeem the property. But if you dispute the amount of the deficiency, you'll lose this right. (N.J. Stat. Ann. §§ 2A:50-4, 2A:50-5).
In a short sale, the 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 fully satisfies the mortgage debt, the lender retains the right to get a deficiency judgment.
But the lender doesn't automatically get a deficiency judgment against the borrower. The lender must file a lawsuit to get the judgment. If you intend to complete a short sale and want to avoid the risk of being sued for the deficiency, ask your lender to include language in your short sale agreement that you won't be liable for any deficiency after the short sale closes.
A deed in lieu of foreclosure is a transaction in which the homeowner deeds the title to the property directly to the lender. In exchange, the lender agrees to release the mortgage lien. In most instances, a deed in lieu will fully satisfy the debt; but a deficiency could happen with this type of transaction. If the deed in lieu documents clearly state that a deficiency exists and the amount, the borrower remains liable for the deficiency. Generally, with a deed in lieu, the deficiency is the difference between the home's fair market value and the total mortgage debt. To avoid liability for this amount, ask the lender to agree that the transaction completely pays off the debt. Be sure to get this agreement in writing. Again, you might have tax consequences if the lender forgives all or some of the deficiency.
With both deeds in lieu and short sales, it's possible to negotiate a reduced deficiency or pay a lump-sum settlement regarding any remaining debt associated with the transaction. You might also consider filing for bankruptcy. Bankruptcy might not be a good idea, though, if a deficiency is your only debt. But eliminating your liability for a deficiency is an additional benefit if you're already considering declaring bankruptcy.
If you're a New Jersey homeowner who's behind in mortgage payments and want to learn whether the lender is likely to seek a deficiency judgment, if you have any defenses to the foreclosure, or need information about different ways to avoid a foreclosure, consider talking to a lawyer. If you can't afford an attorney, a HUD-approved housing counselor can tell you about foreclosure avoidance options.