James R. Balmforth: Deficiencies In Utah Foreclosures

If you are facing foreclosure, or have lost your home through foreclosure, you might still owe your mortgage lender money after the sale. This happens if the foreclosure sale price is less than the amount remaining on your mortgage; it’s called a “deficiency.” Whether your lender can go to court and get a judgment for the deficiency, and then collect it, depends on state law. Deficiencies play a role in short sales too. In most states, you are on the hook for a deficiency after a short sale. But there are ways you can avoid or handle a deficiency.

How Deficiency Judgments are Collected?

You fall behind on your mortgage payments. Your house is sold at a foreclosure auction. You move to a new home and breathe a big sigh of relief. The nightmare is over. It’s a fresh start, and you can now start rebuilding your life and credit. But wait, your mortgage lender contacts you and says that you still owe them money. The foreclosure sale didn’t raise enough cash to pay off your mortgage loan. And if you don’t make up the difference between what you owed and the foreclosure sale price the deficiency your lender will take you to court and get a deficiency judgment. A deficiency lawsuit is like a lawsuit to recover an unsecured debt such as credit card debt or medical bills because the deficiency is exactly that, an unsecured debt. Before the foreclosure, your mortgage was a secured debt; you owed your bank a certain amount of money and your home guaranteed repayment. Because you failed to pay back your mortgage loan, the bank had the right to sell your home to recoup the debt. After foreclosure, you might still owe your bank some money (the deficiency), but the security (your house) is gone. So, the deficiency is now an unsecured debt. You might be thinking to yourself, “But the bank foreclosed! I don’t own the house anymore. How can I still owe them money?” When you originally took out the mortgage you used to buy your home, you signed two documents. One of these documents was a promissory note, in which you promised to repay the mortgage debt to your lender. The other document was a security agreement a mortgage or deed of trust in which you pledged your house as security for the loan. The security agreement gave your lender the right to foreclose. Once the foreclosure is over, the security agreement is no longer in effect. But the promissory note lives on, as does your obligation to repay any remaining debt. If your lender sues you to recover the deficiency and wins, the court will issue a judgment ordering you to pay off the deficiency. If you ignore this court order, your lender can use the deficiency judgment to place liens on other property that you own, garnish your wages, or freeze your bank accounts.

Can Your Lender Sue You for the Deficiency?

Whether your lender can sue you to recover the deficiency depends on state law. Most states allow lenders to sue borrowers for deficiencies after foreclosure or, in some cases, in the foreclosure action itself. Some states allow deficiency lawsuits in judicial foreclosures, but not in non-judicial foreclosures. Other states forbid deficiency lawsuits if the house that secured the mortgage was the borrower’s primary residence. Still others cap the amount that lenders can recover in deficiency lawsuits to the difference between the outstanding mortgage debt and the house’s fair market value. Keep in mind that just because your lender can sue you for the deficiency, it doesn’t mean that your lender will sue you. Lawsuits are expensive. Your lender most likely won’t sue you if they think they won’t recover anything. If you, like many borrowers in foreclosure, have no income or assets that your lender can seize with a deficiency judgment, you’re considered “judgment proof,” and your lender probably won’t sue you for the deficiency.

What If You Can’t Pay the Deficiency?

If you can’t afford to pay back the deficiency and you want to avoid having your wages garnished or your accounts frozen, talk to your lender. See if the lender is willing to work out a repayment plan with you or settle for a reduced amount. (Be aware that, ordinarily, when $600 or more of debt is forgiven or canceled by a creditor, the amount that has been forgiven is considered income for federal tax purposes.) If it won’t budge or negotiations fail for another reason, you might want to consider filing for bankruptcy. If you qualify for Chapter 7 bankruptcy, it could wipe out the deficiency debt, along with many of your other unsecured debts. With a Chapter 13 bankruptcy, you might have to repay just a portion or none of the deficiency. If you think bankruptcy might be a way out for you, talk to a bankruptcy attorney and do some research on your own. When foreclosure sale proceeds aren’t sufficient to repay the full amount of a mortgage loan, the difference between the sale price and the total debt is called a “deficiency.” A short sale or deed in lieu of foreclosure might also result in a deficiency. Many states allow a foreclosing bank to get a personal judgment, called a “deficiency judgment,” against a borrower for the amount of the deficiency. In many states, but not all, a bank can get a deficiency judgment against a borrower for the amount of the deficiency. In other states, though, you don’t have to worry about a deficiency judgment. Some states prohibit banks from suing for deficiencies under certain circumstances, like after a non-judicial foreclosure. Loans that fit in this category are sometimes called nonrecourse loans.

How a Bank Gets a Deficiency Judgment

If a foreclosure is non-judicial, the bank has to file a lawsuit following the foreclosure to get a deficiency judgment. In a judicial foreclosure, on the other hand, most states allow the bank to seek a deficiency judgment as part of the underlying foreclosure lawsuit; a few states require a separate lawsuit. Many states have a law that limits the amount of the deficiency to the difference between the debt and the property’s fair market value. For instance, if your state has this type of law and you owe the bank $400,000, the fair market value of your home is $350,000, and the property sells at a foreclosure sale for $300,000, a deficiency judgment will be limited to $50,000 even though the bank technically lost $100,000 (the difference between the amount owed and the sales price). Fair market value typically is determined by a fairly complex statutory appraisal process set out in state statutes.

Filing for Bankruptcy to Wipe Out a Deficiency

You might be able to wipe out your liability to pay a deficiency judgment by filing for bankruptcy. While it might not make sense to file for bankruptcy just to discharge a deficiency judgment, if you’re considering bankruptcy to deal with multiple debts like credit card balances, unpaid medical and utility bills, and personal loans consider talking to a bankruptcy attorney.

Talk to a Foreclosure Lawyer

Deficiency judgment laws vary from state to state and can be complex. If you’re facing a foreclosure, it’s important to understand how the law works in your state. To find out more, consider talking to a knowledgeable foreclosure lawyer.

Lenders Not Pursuing Deficiencies

The backdrop of the deficiency actions is a 2013 law passed intended to quicken the handling of foreclosure cases. One part of that law, though, reduced the amount of time lenders had to seek deficiency judgments from five years to one. The law became effective July 1, 2013, and meant deficiencies for all foreclosures effective by that date and for any time after July 1, 2009, would have to be filed by July 1, 2014. By and large, lenders appear to have not pursued deficiencies.

Utah Deficiency Judgment

A Utah lender has the right to seek a deficiency judgment after foreclosure if the amount the home sold at auction does not cover the entire mortgaged amount. Usually the mortgage that actually foreclosed on the property will have three months to seek the judgment. If there are other liens and/or mortgages on the property they may have up to six years to seek a judgment. A short sale will avoid the possibility of a deficiency judgment as long as the agreement between you and the bank states you will not be responsible for any shortage. A good short sale agent will be trained to negotiate on your behalf. If there is more than one lien or mortgage on your property you may end up with a short sale deficiency judgment. Don’t forget all parties involved must approve the short sale and just because the first mortgage is releasing you of your obligation doesn’t mean the second mortgage will do the same. At any time within three months after any sale of property under a trust deed as provided in Sections 57-1-23, 57-1-24, and 57-1-27, an action may be commenced to recover the balance due upon the obligation for which the trust deed was given as security, and in that action the complaint shall set forth the entire amount of the indebtedness that was secured by the trust deed, the amount for which the property was sold, and the fair market value of the property at the date of sale. Before rendering judgment, the court shall find the fair market value of the property at the date of sale. The court may not render judgment for more than the amount by which the amount of the indebtedness with interest, costs, and expenses of sale, including trustee’s and attorney’s fees, exceeds the fair market value of the property as of the date of the sale. In any action brought under this section, the prevailing party shall be entitled to collect its costs and reasonable attorney fees incurred.

There are two types of foreclosures in Utah.

• Judicial Foreclosure: The lender files the complaint against the borrower for not paying the monthly mortgage. The lender also has to receive a decree of sale from the court that has jurisdiction in the country where your property is located. This has to be done before foreclosure proceedings can begin. Assuming that the court finds the borrower at fault; the court will then set a time period for the borrower to pay. If the borrower is not able to pay then the court orders the property to be sold.

• Non–Judicial Foreclosure: This is the most common foreclosure and happens when the mortgage or deed of trust includes a power of sale clause. This clause is the pre-authorization from the borrower to pay the balance of the property off with the property sale if the borrower is in default of their loan. When a power of sale exists in a mortgage or deeds of trust, the lender is given the authority to sell the property.

A property owner can decide that their monthly loan payment is too hard to make and they need to move one. Usually there are three things that happen:
• Home is to be sold in foreclosure
• Sell home in a short sale
• Transfer the title to the lender directly with a deed in lieu of foreclosure

Utah Short Sale

In a short sale, you sell your home for less than the total debt balance. The lender agrees to accept the sale proceeds and release the lien on the property. The proceeds of the sale pay off a portion of the amount owed. Short sales are one way for borrowers can avoid foreclosure.

What Is a Deficiency Judgment Following a Short Sale?

Because the sale price is “short” of the full debt amount in a short sale, the difference between the total debt and the sale price is the “deficiency.” Example. Suppose you’re approved by your lender to sell your property for $200,000, but you owe $250,000 on the mortgage. The difference ($50,000) is the deficiency. In many states, the lender can seek a personal judgment against you after the short sale to recover the deficiency amount. Generally, once the lender gets a deficiency judgment, it may collect this amount—in our example, $50,000—from the borrower by doing such things as garnishing your wages or levying your bank account.

How Can I Avoid a Deficiency Judgment Following a Short Sale?

Assuming your state doesn’t have a law prohibiting a deficiency judgment following a short sale, there are several ways you can avoid having to pay back a deficiency:

• Declare Bankruptcy: If you’re liable to pay the deficiency after a short sale, one possibility is to file bankruptcy to eliminate the debt. If you qualify, a Chapter 7 bankruptcy discharges the deficiency relieving you of the debt, while a Chapter 13 bankruptcy will usually require that you pay a portion of the total amount owed. Bankruptcy may not be a good idea if a deficiency judgment is your only debt, but it could be a good option if you have multiple debts that you can’t afford to pay.

• Negotiate a Waiver of the Lender’s Right to Seek a Deficiency Judgment: Some lenders will agree to waive the deficiency. When negotiating with your lender for approval of your short sale, ask the lender to waive its right to seek a deficiency judgment. If your lender agrees, this provision must be included in the short sale agreement. To eliminate your liability for the deficiency, the agreement must expressly state that the transaction is in full satisfaction of the debt or include similar language.

• Make a Settlement Offer: If your lender refuses to waive the deficiency entirely, you can offer to settle the deficiency for a smaller amount. Lenders are sometimes willing to agree to accept a smaller amount because collecting a deficiency debt can be a lengthy and costly process. It is often easier for the lender to accept a reduced lump sum than to try to collect the full amount. Or, you can also negotiate to repay a reduced deficiency debt in installments over time.

• Take the Chance that Your Lender Won’t Actually Sue you for the Deficiency: After the short sale is completed, your lender may call you or send letters stating that you still owe money. These letters may come from an attorney’s office or a collection agency and will demand that you pay off the deficiency. Your lender or the collector may even try to intimidate you into making payments. However, without an actual deficiency judgment, the lender cannot freeze your bank accounts, garnish your wages, or place judgment liens on other property you may own. To get a deficiency judgment, the lender must file a lawsuit. But lawsuits are costly and most borrowers who are forced to complete a short sale of their homes to avoid a foreclosure are judgment-proof. (This means they don’t have much in the way of cash reserves or other assets that a creditor can take to pay off the judgment.) A lender will only sue for a deficiency judgment if it thinks you have sufficient assets or funds to repay the deficiency. If you can’t afford to pay the deficiency, it is possible that your lender won’t bother to file a lawsuit.

• Possible Tax Consequences: If the lender forgives the amount of the deficiency (say, as part of a settlement) and issues you an IRS Form 1099-C, you might have to include the forgiven debt as taxable income. Tax laws are complicated and there are exceptions and exclusions that could save you from having to report canceled debt as part of your income. If you have tax questions, consider talking to a tax attorney. If you can’t afford an attorney, you might qualify for free or low-cost assistance from a Low Income Taxpayer Clinic.

How to Get Rid Of a Deficiency Judgment after Foreclosure

Many debtors who are walking away from their homes are finding that they have a deficiency judgment after the lender fails to recoup the entire amount of the mortgage after the foreclosure auction. Generally speaking, a mortgage lender can pursue a debtor for the balance of the mortgage even if they repossessed the home in foreclosure or if the home was sold in a short sale.

But there are some ways that a debtor can avoid paying a deficiency judgment:
• File bankruptcy: If the debtor has significant debt and too little income, filing bankruptcy may be wise after receiving a deficiency judgment after foreclosure. Bankruptcy will discharge the deficiency mortgage and any other unsecured debts and that forgiven debt is not subject to taxes.

• Ask the lender to forgive any deficiency that you may have after a foreclosure or even after a short-sale. But you will need to do this before the home goes through foreclosure or is sold. Lenders have the power to forgive the deficiency judgment; but even afterwards, you may still be on the hook for paying taxes on the forgiven debt.

• If you are able to get the lender to forgive your deficiency judgment after foreclosure or a short sale, you may be able to avoid paying taxes on that forgiven debt under certain circumstances. Under the Mortgage Debt Relief Act of 2007, the IRS may not tax forgiven debt that was incurred for the purpose of constructing or substantially improving the principal residence of the debtor. For example, if a debtor took out a home equity loan to repair the roof their home and add a deck, then they may not incur taxes if that debt is forgiven.

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When you need legal help with foreclosure in Utah, please call Ascent Law LLC for your free foreclosure consultation (801) 676-5506. We want to help you.