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Understanding deficiency judgments after foreclosure

On Behalf of | May 6, 2022 | Real Estate Law

No homeowner wants to see their home wind up in foreclosure. But life can throw difficulties at you that you cannot completely overcome. Whatever ultimately happens, you’ll have a lot of decisions to make – meaning that you need to be well informed. Deficiency judgments are one aspect of the foreclosure process.

Foreclosure basics

Foreclosures are scary but not overly complicated. When a homeowner falls behind on their mortgage, the lender generally has the legal authority to begin foreclosure proceedings, since the home is the collateral behind the debt owed. If the home is sold at a foreclosure sale, the purchase price of the home is applied toward the outstanding debt.

What is a deficiency judgment?

As heartbreaking as it is to lose a home to foreclosure, once it is done, you may at least be able to begin moving on. But this is not always the case. Michigan law permits what are known as deficiency judgments, which are lawsuits to collect a debt. Let’s say your mortgage has an outstanding debt of $200,000 but, at the foreclosure sale, the home only sells for $150,000. This creates a deficiency of $50,000 on the outstanding debt.

A deficiency judgment is a lawsuit filed by the lender, in court, seeking to collect whatever deficiency remains on the debt. If it is granted, the lender now has the ability to collect the debt through standard means of collections.

Short sales and deeds in lieu will not remove the threat of a deficiency judgment unless you have an agreement with the lender where they waive the right to the judgment. And although most foreclosures are nonjudicial in nature, if the foreclosure itself is conducted through the courts, a deficiency judgment can be issued at the same time as the foreclosure. Finally, there are circumstances under which you can challenge a deficiency judgment, such as when it is your lender that purchases the home at the foreclosure sale.

With so much on the line, if you find yourself in danger of foreclosure, speak with a qualified professional who is experienced in Michigan foreclosure laws.