For homeowners facing the imminent loss of their home to a foreclosure, the added threat of a personal deficiency judgment lurks in the background. Because a deficiency judgment is personal, it may have negative effects on your credit and can result in wage garnishments, bank account levies, or subject you to other collection methods. Therefore, for those facing foreclosure, it is important to understand the personal deficiency judgment process and the options available to you.
Understanding the Personal Deficiency Judgment Process
I. The filing of a personal deficiency action.
To obtain a personal deficiency judgment against a homeowner, the lender must first foreclose on the mortgage. N.J.S.A. 2A:50-2. To foreclose on the mortgage, the lender must file a mortgage foreclosure action based upon the mortgage document. Once a proper final judgment of foreclosure is obtained in the mortgage foreclosure action, the court will schedule a public foreclosure sale. As detailed below, the date of the foreclosure sale triggers the period within which the lender may seek a personal deficiency judgment.
Pursuant to N.J.S.A. 2A:50-1, a personal deficiency judgment may not be entered against a homeowner within the mortgage foreclosure action itself. Rather, to seek a personal deficiency judgment, a lender must file a separate deficiency action within three months of the foreclosure sale date. N.J.S.A. 2A:50-2. The three month period referenced above operates as a statute of limitations and provides a defense should the filing of the deficiency action be untimely. N.J.S.A. 2A:50-22(b). A deficiency action is based upon the promissory note rather than the mortgage document and may only be pursued against signors of the promissory note who were also named in the foreclosure action. N.J.S.A. 2A:50-2. Like any lawsuit, the deficiency action requires service of process upon any potential defendants and an opportunity for such defendants to be heard.
II. Determining the deficiency amount.
The deficiency amount is generally determined by subtracting the foreclosure sale price from the existing mortgage debt plus interest and costs. N.J.S.A. 2A:50-2. However, a defendant in a deficiency action may file an answer disputing the amount of the deficiency. N.J.S.A. 2A:50-3. In such instances, both parties may introduce evidence as to the fair market value of the mortgaged property at the time of the foreclosure sale. Id. The court will then make a determination as to the true fair market value of the property and deduct that amount from the mortgage debt rather than the foreclosure sale price to determine the deficiency amount. Id. The parties also have the option to forego the evidentiary hearing and accept the fair market value fixed by three appraisers of the parties choosing. N.J.S.A. 2A:50-3. The deficiency amount, once determined, is entered personally against the defendant in the form of a judgment. A defendant’s opportunity and incentive to minimize the deficiency amount is evident.
The threat of ending up with a personal deficiency judgment after losing your home to a foreclosure is a terrifying proposition. As detailed above, if the lender chooses to pursue a personal deficiency judgment against you, there exists a strict procedure which must be adhered to before that can become a reality. It is crucial to understand the deficiency judgment process to preserve your defenses and minimize your potential liability.
If you are facing foreclosure or have questions regarding potential deficiency judgments, please contact our offices for a free initial consultation.