Deficiency Judgements (Judgments)

by Rene G. Salinas on October 4th, 2010

Let’s create a scenario so I can explain this better. Your mortgage company (Wells Fargo, Bank Of America what have you) forecloses upon your home. They will then turn your home around and sell it in order to recoup any money owed by you (the previous home owner).

Problem #1:

The mortgage company usually sells the house for less than what is owed. For example, a lender loans a person $200,000 to purchase a home. A few years later, payments aren’t being made and you get foreclosed upon. The home sells for $180,000. Final result is a $20,000 loss to the lender.

Problem #2:

Now let’s discuss the money owed by you. It can contain the previous mortgage amount, any late payments, lawyers’ fees, and administrative costs incurred during the foreclosure process.

Now we get to where you’re legally bound to those costs (the two problems state above). In Arizona, the company may be entitled to receive the deficiency judgment in court and come after you for the remaining balance owed. The bad news is this means that the lender could sue you for $20,000 using the example above. The good news is there are limitations to a deficiency incurred during foreclosure in this great state.

Arizona’s “anti-deficiency” statutes prevent a lender from suing a person for any losses on a home after foreclosure. As outlined in Arizona Revised Statutes, Title 33, Chapter 6.1, a person may not be sued by his or her lender if the property is:

Located on 2.5 acres or less
A single family residence or duplex

This only applies if the decrease in value is not due to the home owner’s neglect.

The lender has 90 days after the sale of the property to begin judicial proceedings to recover any losses if they decide to seek a deficiency judegment. If they don’t pursue it they lose the right to recover the deficiency. That’s a lot of time to get the paperwork in though.

Let’s say you don’t qualify for the exception. What can you do? Well, one option is to deed the property back to the lender prior to foreclosure. This is known as a deed-in-lieu of foreclosure. If the lender accepts the deed they agree to accept the property for the amount that you owe, thus eliminating any potential deficiency.

Note: If you deed the property back to the lender, you may be taxed on the amount of the deficiency that was forgiven by the lender. You (in the previous example) deed the home to the lender, the lender will forgive the $200,000 loan and accept the $180,000 as payment in full. However, you may now have to report the $20,000 as taxable income on your next tax return. Ouch! There is a lot of legal jargon that goes along with this, but I’m not an attorney.

The one loan that the exception doesn’t apply: