Deficiency Judgments: When a Foreclosure Sale is Not Sufficient to Wipe Out Mortgage Debt
When a borrower is not able to keep up with their mortgage payments their lender has the option of initiating foreclosure proceedings and eventually selling the mortgaged property at a foreclosure sale. But what happens if the property is worth less at the foreclosure sale than the total amount owed by the borrower? Unfortunately this happens frequently, and what results is a “deficiency” in the amount of the difference between the foreclosure sale price and the borrower’s outstanding debt. For example, if a house with a remaining mortgage balance of $100,000 is sold at a foreclosure sale for $75,000 then there is a deficiency in the amount of $25,000. In order to recoup the deficiency that they are owed, lenders in Alabama can seek a “deficiency judgment”.
What is a Deficiency Judgment?
A deficiency judgment is a court order issued against a borrower indicating that a foreclosure sale did not cover the borrower’s outstanding mortgage in full. The judgment operates as a lien on the borrower for the amount of the deficiency and allows the lender to come after the borrower’s personal property, wages, real estate holdings, or other assets in order to satisfy the debt. Courts in Alabama do not automatically issue deficiency judgments and, therefore, lenders who wish to obtain such a judgment must file a lawsuit with the court. If a lender does not ask the court for a deficiency judgment then the money obtained from the property’s foreclosure sale is considered to be legally sufficient to satisfy the borrower’s outstanding mortgage.
Deficiency Judgments in Alabama
Most foreclosures in Alabama are nonjudicial, which means that lenders can foreclose on a property without going to court. This differs from judicial foreclosure states which require lenders to involve the court in all foreclosure proceedings. According to the Alabama Code §35-10-1 et. seq., after a mortgaged property is sold at a foreclosure sale in Alabama the lender can, if there is a deficiency, file a deficiency lawsuit against the borrower. Some states place limits on the amount that a lender can obtain via a deficiency judgment, but there is no such limit in Alabama.
While the notion of deficiency judgments may seem fairly straightforward there are several other related details that lenders must be aware of. For example, lenders in Alabama owe borrowers a duty of fairness and good faith when bidding at a foreclosure sale on one of their borrower’s properties. In other words, a lender is legally allowed to purchase a property that they themselves have foreclosed on, however, the duty of fairness and good faith prohibits them from making an offer that is unreasonably far below the property’s market value.
Need Legal Advice?
If you are a lender located in Alabama and would like to obtain a deficiency judgment contact Cloud Willis & Ellis, LLC today. Pursing a deficiency judgment can be a time-consuming endeavor, however, employing a competent foreclosure attorney to do the leg work for you can make the process much more streamline. To discuss your legal options contact our offices in either Birmingham (205-322-6060) or Mobile (251-545-4844) today.