Deficiency Judgments in Foreclosure

Question: My home was taken by the bank through foreclosure several months ago. Now, the junior lender on my home is asking me to pay them another $80,000. Wasn’t this loan wiped out when the senior lender foreclosed? What is a deficiency judgment? Do I need to file bankruptcy?

Answer:
When a lender forecloses on a property they may do so by judicial foreclosure, a legal action in court, or by nonjudicial foreclosure, the power of sale contained in a deed of trust or mortgage. A deficiency judgment is possible when the amount received in a foreclosure sale is not enough to pay off the amount owed on the mortgage loans. A lender who chooses nonjudicial foreclosure cannot receive a deficiency judgment. However, while a foreclosure sale will strip any junior lienholders of their security interest in the property sold, they will retain the right to sue the borrower in court for the amount owed.

This is so because the “one action rule,” described in CCP § 726, prevents the lender who foreclosed from using nonjudicial foreclosure to speed up the sale and then using the courts as a second method of recovery. The junior lender, on the other hand, did not choose the nonjudicial foreclosure route and is not barred from using the courts to try and collect on the debt.

This exception to the general rule that “no deficiency judgments are available when there is a nonjudicial foreclosure” does not apply when a single lender holds both the junior and senior liens. But when the single lender sells or assigns the liens to independent parties, the new buyer/assignee is ordinarily protected and could pursue a court action for a deficiency judgment.
If a junior lender wants to go to court to obtain a deficiency judgment they must do so within three months of the foreclosure sale. CCP § 580(a). If three months have passed since your foreclosure sale, the junior lender can no longer go to court to get a judgment and attach your other property. However, the debt remains and the junior lender can continue to try and collect the debt by contacting you. If you file bankruptcy the automatic stay would prevent all creditors from contacting you for a period of time and this debt would be removed if you receive a discharge in bankruptcy.

Tax Implications of Nonjudicial Foreclosure
When a lender uses nonjudicial foreclosure, the lender, in effect, forgives, or gives to the borrower, the necessary amount over the foreclosure sale price, to pay off their loan. This amount which is forgiven, or given, to the borrower may count as income to be reported on the borrower’s taxes. The Mortgage Forgiveness Debt Relief Act of 2007 excludes from gross income discharges of indebtedness on principal residences that occur on or after January 1, 2007, and before January 1, 2010 (extended through 2012). If you have lost a home to foreclosure you should speak with your tax professional.

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