The proceeds of the auction sale of your home are used to reimburse the plaintiff for the amount you owed for the mortgage. The sale amount will also be used to pay off any other creditors who have liens on the property. A deficiency is the sum still owed to the plaintiff if the sale price is insufficient to pay off your debt. For instance, the house might sell at auction for only $450,000 despite a $500,000 total debt. The shortfall is $50,000.
In most states, including New York, the lender may get a “deficiency judgment” (a personal judgment) against the borrower for the deficiency amount if a foreclosure sale results in a deficiency. But in New York, the lender has a set period of time in which to file for a deficiency judgment, and if they do, the court may cap the amount awarded. Additionally, the lender can only obtain a deficiency judgment if you personally receive notice of the litigation or you participate in it.
In this article, Eastcoastlaws.com will outline all you need to know about deficiency judgments after foreclosure in New York.
How Foreclosure Sales Work in New York
In the event that you are unable to make mortgage payments, the lender has the right to sell your house through a procedure known as “foreclosure” in order to recover the unpaid balance. The final phase in a judicial or nonjudicial foreclosure is the foreclosure sale, where the property is sold to a new owner at a public auction once the lender has satisfied all legal conditions for foreclosure.
The first offer at the auction is made by the lender who is foreclosing, and it is a “credit bid.” The lender receives a credit in the amount of the borrower’s debt when they place a credit bid. The lender may offer a lower bid or one equal to the whole amount of the debt, including all fees and charges associated with the foreclosure. Most of the time, the lender places the highest bid at the auction and buys the property since no one else does, making them the new owners. The property is regarded as “real estate acquired” if the lender purchases it at the auction and receives title to it (REO). At foreclosure sales, lenders frequently make offers that are lower than the total mortgage debt owed by a borrower.
What Is a “Deficiency Judgment” After a Foreclosure Sale?
A deficiency judgment is a court order requiring a borrower to pay the difference between the sale price of a foreclosed property and the outstanding balance of the loan. In other words, it is a judgment for the remaining debt owed by the borrower after the foreclosed property has been sold.
For example, if a borrower owes $300,000 on their mortgage and the property is sold at a foreclosure sale for $200,000, the lender may seek a deficiency judgment for the remaining $100,000.
In some states, including New York, the lender may only seek a deficiency judgment if the loan was secured by a mortgage on the foreclosed property and if the state allows for deficiency judgments. In these states, the lender must also follow specific procedures to obtain a deficiency judgment.
It is important for borrowers to understand the laws in their state regarding deficiency judgments and to seek the advice of an attorney if they are facing a foreclosure action or if they have questions about a potential deficiency judgment.
State Law Sometimes Limits Deficiency Judgments
State law sometimes imposes limits on deficiency judgments. Some states restrict deficiency judgment amounts, such as by requiring that the borrower get credit for the home’s fair market value if the foreclosure sale price is less. That is, the property’s fair market value is substituted for the foreclosure sale price when calculating the deficiency amount.
Other states limit set time limits for how long lenders get to seek a deficiency judgment against a borrower, typically ranging from three months to one year after the foreclosure sale. (To find out the time limit in your state, talk to a foreclosure lawyer.) And various states require specific procedural requirements to get a deficiency judgment, while specific some don’t allow deficiency judgments in certain circumstances, like after nonjudicial foreclosures.
How Lenders Collect Deficiency Judgments
Once a lender receives a deficiency judgment, it often has the right to pursue the borrower for this amount (in the case above, $50,000) through standard collection techniques such as wage garnishment or bank account levy.
You can likely get rid of your liability for a deficiency judgment, like many other dischargeable debts, even if your lender obtains a deficiency judgment.
Will My Lender Sue Me for a Deficiency Judgment?
Even while state law gives your lender the authority to seek a deficiency judgment against you, it may opt not to do so, especially if you don’t have many assets to cover the penalty. The lender may conclude that the cost and effort of obtaining a deficiency judgment is not worthwhile.
However, you should be aware of the possibility that your lender may go after you for a deficit after a foreclosure. Additionally, even if the lender decides not to pursue legal action against you for a deficiency judgment, it could still transfer the debt to a debt buyer who could subsequently sue you for the deficit.
Deficiency Judgments After New York Foreclosures
In New York, foreclosures must go through the state court system since they are judicial in nature. The foreclosing lender files a lawsuit (a “complaint”) against the borrower to start the foreclosure process. If you don’t respond to the lawsuit, the lender will approach the court for a default judgment, which is likely to be granted, and use that to hold a foreclosure sale.
But the case will go through the court system if you decide to reply to the foreclosure lawsuit. Following then, the lender could seek the court for a summary decision. A request for summary judgment urges the court to rule in favor of the lender because there is no disagreement regarding the crucial details of the case. The judge will enter a judgment and order your home sold at auction if the lender is successful in obtaining a summary judgment or if you lose your case in court. The lender may receive a deficiency judgment as part of the foreclosure if the sale does not generate enough revenue to satisfy the debt—subject to specific restrictions. (N.Y. Real Prop. Act. Law § 1371)
Time Limit for Requesting a Deficiency Judgment
In New York, a deficiency judgment is a court-ordered payment that a borrower must make to a lender if the sale of the foreclosed property does not cover the outstanding mortgage debt. The time limit for a creditor to request a deficiency judgment is 90 days from the date of the foreclosure sale. It’s important to note that not all states allow deficiency judgments and that the availability of deficiency judgments varies by state. In New York, if the creditor fails to request a deficiency judgment within 90 days of the sale, they forfeit their right to collect the remaining debt from the borrower.
Fair Market Value Limitation
The property’s fair market value, as determined by the court, serves as a ceiling on the shortfall. The entire amount owed by the borrower less the market value established by the court or the sale price of the property, whichever is larger, results in the deficiency judgment amount.
What Happens to Second Mortgages, HELOCs, and Other Junior Liens?
In the event of a foreclosure, second mortgages, home equity lines of credit (HELOCs), and other junior liens may be impacted differently. When a property is foreclosed, the first mortgage is paid first from the sale proceeds. If the sale proceeds are not enough to cover the full amount of the first mortgage, the lender may request a deficiency judgment against the borrower to collect the remaining balance.
In the case of a second mortgage or HELOC, these junior liens may not be fully paid off from the sale proceeds and may be considered “underwater.” If the junior lienholder does not receive payment in full, they may also request a deficiency judgment against the borrower. However, they would only be able to collect the remaining balance after the first mortgage has been paid in full.
It’s important to note that some states do not allow deficiency judgments in the case of junior liens. In those states, the junior lienholder may be out of luck and would not be able to collect the remaining balance from the borrower. Additionally, the foreclosure of a property may have a negative impact on the borrower’s credit score, making it difficult for them to obtain new loans or lines of credit in the future.