One of the major concerns that face homeowners that are delinquent on their mortgage is that in addition to losing their homes they may also face a deficiency judgment. A deficiency after a foreclosure is the difference between what is owed on the mortgage and what the bank recovered on the house after a sheriff sale. The problem in the current economy is that many houses are upside down in that more is owed than the home is worth, thus leaving a borrower exposed to a significant liability after the bank takes the house to sheriff sale.The content of this article focuses on New Jersey law with respect to deficiency judgments and the law of each individual's state should be reviewed and an attorney in that state consulted. In New Jersey, a wide variety of defenses exist in a deficiency action. The courts in New Jersey do not favor deficiency actions and they are scrutinized carefully.
Deficiency Actions After a Foreclosure Must Be Started Within 3 Months After Sheriff Sale
Most important, the action for any deficiency on a mortgage must be commenced within 3 months from the date of the sheriff sale or, if confirmation is or was required, from the date of the confirmation of the sheriff sale of the mortgaged premises. If the case is not started within three months after sheriff sale, then the bank or lender cannot sue the borrower. Additionally, a deficiency lawsuit cannot be started against any person answerable on the bond or note unless that person was first made a party in the action to foreclose the mortgage.
Fair Market Value Defense to a Deficiency Action and Other Defenses
The most frequently used defense in a deficiency action is the fair market value defense. A borrower or debtor may answer the deficiency action by disputing the amount of the deficiency sued for and both parties may introduce evidence of the fair market value at the time of the sheriff sale. The court, with or without a jury, will determine the amount of the deficiency judgment by deducting from the debt the amount of the fair market value of the property at the time of the sheriff sale. The parties may also agree to accept the fair market value determined by three appraisers.
Among some other defenses available to a defendant in a deficiency action are the following: that the mortgage holder did not first foreclose on the mortgage as required by statute; that the defendant was not joined in the foreclosure action as required by statute; that a proper notice of intention to begin the deficiency action was not filed and recorded as required by statute; that the deficiency action was not begun within the time fixed by the statutes relating to deficiency actions; and that the foreclosure sale failed to exhaust the mortgage security.
Depending on the facts of each case the defendant in a deficiency action may also set up a variety of defenses based upon what occurred when the mortgage was obtained. Some examples of such defenses are forgery in connection with the mortgage; that the parties agreed in the mortgage that liability for the mortgage debt should be limited to the property alone; that the defendant never became liable for the mortgage debt because of personal incapacity; failure of consideration; fraud; consumer fraud; mistake; duress; undue influence; illegality; that the defendant's personal liability is less than asserted by the plaintiff because of illegal interest rates charged; violation of the Truth in Lending Act.
Use of Bankruptcy to Wipe Out Deficiency
Of course, a bankruptcy will wipe out any potential deficiency judgment or stop a deficiency action. Whether a bankruptcy should be filed to wipe out the deficiency liability should be carefully reviewed by a qualified bankruptcy attorney. A bankruptcy prior to the finishing of a foreclosure will also preclude the lender from even starting a deficiency action as the bankruptcy would wipe out any liability of the debtor on the underlying mortgage note.
These defenses to a foreclosure deficiency action are not intended to be exclusive. Depending on the circumstances of each mortgage loan, a variety of other defenses may exist.
CONTACT OUR FIRM'S NEW JERSEY OR NEW YORK BANKRUPTCY OR LITIGATION ATTORNEYS
Contact Scura, Wigfield, Heyer & Stevens to speak with one of our New Jersey or New York bankruptcy attorneys on how to best proceed and whether to defend the deficiency action or file a bankruptcy to stop it.
Our law firm offers bankruptcy solutions and litigation strategies to clients throughout cities and towns of New Jersey, including but not limited to Wayne, Hoboken, Newark, Jersey City, Paterson, Orange, West Orange, South Orange, Irvington, Belleville, Maplewood, Clifton, Wayne, Passaic, Fort Lee, West New York, Morristown, Guttenberg, Union City, Weehawken, North Bergen, Paterson, Hackensack, Englewood, Livingston, Bloomfield, Little Falls, Hillside, Union, Kearny, Harrison, Fairfield, Caldwell, Garfield, Lodi, Totowa, Bayonne, North Bergen, Weehawken, Union City and Secaucus, and Passaic County, Hudson County, Essex County, Bergen County, Union County, Sussex County, New York, Manhattan, New York County, Bronx County, Brooklyn, Long Island, Queens and Staten Island.