A deficiency judgment is a full-fledged judgment for the total balance of the mortgage debt, including all collection costs, legal fees, advances for taxes, insurance, etc etc., less the claimed value of the property foreclosed on AT THE TIME OF THE FORECLOSURE. This is called the shortfall.
The term "deficiency judgment" refers to a judgment for a debt, the amount of which is the shortfall that is created after foreclosure or short sale, when the collateral taken back by the lender (your property) or sold has a current market value that is less than your current debt to the lender. Since the lender was not made whole by taking the property back or by the sale proceeds it received, the law allows it to come after you for the difference
IN FLORIDA, WHAT IS MY RISK OF DEFICIENCY JUDGMENT?
It is EXTREMELY HIGH. Florida law makes it quite simple for the creditor to obtain the deficiency judgment, and give is FIVE YEARS after the foreclosure judgment to do so. Florida has the second highest foreclosure rate in the US, Florida mortgages are heavily upside down, and Florida law makes the process of pursuing deficiency judgment quite simple. This means that the odds are very high that the lender will not realize enough through foreclosure to pay itself back in full for the amount owed, and therefore it will still show a substantial balance due from the borrower. We are definitely seeing deficiency judgment actions in Florida, and will most certainly see many more in the future.
IS IT POSSIBLE THAT THERE WILL BE NO SHORTFALL?
Possible but not likely. If your property is worth more than you owe the lender, odds are good that deficiency judgment will not be a problem. This means there is "equity" in the property, and if so, there is a good possibility that some other bidder will outbid your lender, which will result in your lender getting all of its money. However, due to the large numbers of mortgages in Florida now that are upside down, the odds are that this will not happen, and that therefore the lender will wind up owning your property. If the lender is the successful bidder, it then continues to add interest, costs, advances and expenses to the debt until the property is disposed of.unless you have significant equity in your property. Property values in Florida are continuing to fall. Foreclosure properties bring even less than "normal" sales, so the odds of a shortfall are even greater, and the size of the shortfall is likely to be even larger, than if you tried to sell your property yourself.
HOW DOES THE AMOUNT OF THE DEFICIENCY JUDGMENT GET DETERMINED?
The creditor (or some party on its behalf) will put before the court its position on the value of the property, and also the numbers included in the foreclosure judgment. Unless the borrower successfully opposes those numbers, that is what the court uses.
I HAVE HEARD THAT LENDERS ARE NOT SEEKING DEFICIENCY JUDGMENTS, SO WHY WORRY?
That is not true. Some lenders (or the parties to whom they have sold their rights) are already beginning to pursue deficiency judgments. And, since they have five years from the date of the foreclosure judgment to even start the process, and since the foreclosure crisis did not start until 2007, in virtually all cases they still have time to do this.
Deficiency judgment did not used to happen until the mortgagage crisis began, so this is a very recent development, because people were not upside down on their mortgages, so there was not much chance there would be a deficiency and there were few foreclosures. However, that is all different now. While some people may think they "walked away", few realize that the mortgage company has 5 years to START pursuing them.
WHAT IF I HAVE A SECOND MORTGAGE?
Holders of second mortgages have all the same rights foreclose as do holders of first mortgages. Your second mortgage holder can foreclose and sell your house out from under you. The only difference is that when the foreclosure sale is held, the holder of the first mortgage gets to bid and unless and until another bidder goes higher, the holder of the first mortgage winds up buying the property, and then evicting you, and you still owe the second mortgage the full amount of the debt, plus accruing interest. The same thing happens if the first mortgage holder forecloses - the second mortgage is gone, but the debt remains. In either case, the second mortgage holder can pursue deficiency judgment for the total amount due it, plus accruing interest.
WHAT CAN I DO TO AVOID DEFICIENCY JUDGMENT?
The answer depends on exactly where things stand regarding your mortgage. If a foreclosure has been concluded, your only options are either to consider bankruptcy or to consider defending against efforts to obtain the deficiency decree. The second option can be difficult to do, since it is very possible that you would not even know about it until it was over (they only have to send notice by regular mail to your last known address). And, if you are eligible now for Chapter 7 bankruptcy but you wait, it may be that when this all lands in your lap, you will no longer have access to that option, which is often the best option.
If no foreclosure has yet been finalized, careful analysis by a knowledgeable foreclosure defense attorney is necessary, to determine your risk, whether you currently have any negotiating leverage, or how it might be possible to plan an escape route.
REALTORS ARE TELLING ME THAT A SHORT SALE WILL AVOID ANY FURTHER LIABILITY
This has become an ENORMOUS problem in Florida. I am constantly amazed at the things new callers are telling me they are being told by realtors. There are very very few times when a short sale in Florida takes a borrower out of the mess. Usually, what it does is to take you out of your house, give ALL the proceeds to the mortgage company (which is usually more than it would get if it completed foreclosure), pay nice commissions to the realtors, and leave you on the hook for the ENTIRE DIFFERENCE between the mortgage balance with all additonal charges for collection fees, advances for taxes, insurance, etc. added on and the short sale proceeds.
ARE DEFICIENCY CLAIMS ACTUALLY BEING MADE ?
YES ! I am defending several right now. Some result from foreclosures, a brand new one who just called this week did a short sale. Because the judgment holder has such a long time-line within which it can pursue this (5 years from the judgment or the short sale), many are in no rush, given the backlog in the courts and in their own departments. However, all have admitted that they have every intention of pursuing deficiencies and many of the collection firms are gearing up to handle these. So, do not believe ANYONE who tells you that you are not at great danger from a deficiency claim, unless they provide you with something in writing from your mortgage holder which says that IT WAIVES ALL RIGHTS TO DEFICIENCY. That is NOT the same thing as releasing the mortgage lien to allow the short sale to close.
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This Legal Guide was updated on August 21, 2011.