How Foreclosure Deficiency Arises
When your home is foreclosed and sold, the sale price may be less than what you owe. The difference is the deficiency balance. For example: you owe $250,000, the home sells for $180,000, and there are $20,000 in costs. The deficiency is $90,000. In states that allow it, the lender can sue you personally.
Judicial vs. Non-Judicial Foreclosure
In judicial foreclosure states, deficiency judgments are generally available as part of the same proceeding. In non-judicial foreclosure states, some states bar deficiency judgments entirely if the lender chose the non-judicial route.
Fair Market Value Protections
Many states require the deficiency to be calculated based on fair market value, not the actual sale price. If the fair market value equals or exceeds the debt, there is no deficiency regardless of what the property sold for.
Frequently Asked Questions
Can I be sued after a short sale?
It depends on the terms. If the lender approved the short sale and waived the deficiency in writing, they cannot pursue you. Always get the deficiency waiver in writing before closing.
Does a foreclosure deficiency affect my taxes?
Forgiven debt may be taxable as income (1099-C). The Mortgage Forgiveness Debt Relief Act may exclude up to $750,000 on a primary residence. The insolvency exclusion under IRC 108 may also apply.
Can bankruptcy eliminate a foreclosure deficiency?
Yes. A foreclosure deficiency is unsecured debt and is fully dischargeable in Chapter 7 bankruptcy. The discharge injunction permanently bars collection.
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