In Delaware, if you go through foreclosure and the sale price is not enough to cover the balance of your mortgage, the foreclosing lender can come after you for the "deficiency." Read on to learn what a deficiency judgment is, when your mortgage lender can collect one against you in Delaware, and what happens to the deficiency in a short sale or a deed in lieu of foreclosure in Delaware.
(For more articles on foreclosure in Delaware, visit our Delaware Foreclosure Law Center.)
When a lender forecloses on a mortgage, the total debt owed by the borrowers to the lender frequently exceeds the foreclosure sale price. The difference between the sale price and the total debt is called a deficiency.
In some states, the lender can seek a personal judgment against the debtor to recover the deficiency. Generally, once the lender gets a deficiency judgment, the lender may collect this amount (in our example, $50,000) from the borrowers by doing such things as garnishing the borrowers’ wages or levying the borrowers’ bank account. (Learn about methods that creditors can use to collect judgments.)
(To learn more about deficiency judgments in the foreclosure context, see our Deficiency Judgments After Foreclosure area.)
Foreclosures in Delaware are judicial, which means the lender has to go through state court to get one. (To learn more about the difference between judicial and nonjudicial foreclosure, and the procedures for each, see Will Your Foreclosure Take Place In or Out of Court?)
Learn more about the Delaware foreclosure process.
Deficiency judgments are allowed in Delaware. The lender must file a separate lawsuit after the foreclosure to recover the deficiency (Del. Code Ann. Tit. 10, § 5002).
The amount of the deficiency judgment will generally be the difference between the total debt and the foreclosure sale price. However, if the borrower believes that the high bid at the foreclosure sale is grossly disproportionate to the fair market value of the property, he or she may request that the court set aside the sale or limit the amount of the deficiency judgment. See Girard Trust Bank v. Castle Apartments, Inc., 379 A.2d 1144 (1977).
Generally, when a senior lienholder forecloses, any junior liens (these would include second mortgages and HELOCs, among others) are also foreclosed and those junior lienholders lose their security interest in the real estate. If a junior lienholder has been sold-out in this manner, that junior lienholder can sue you personally on the promissory note. This means that if the equity in your home doesn’t cover second and third mortgages, you may face lawsuits from those lenders to collect the balance of the loans.
Learn more in our article What Happens to Liens and Second Mortgages in Foreclosure?
A short sale is when you sell your home for less than the total debt balance remaining on your mortgage and the proceeds of the sale pay off a portion of the mortgage balance. (Learn more about short sales to avoid foreclosure.)
In Delaware, a lender can get a deficiency judgment following a short sale. To avoid a deficiency judgment, the short sale agreement must expressly state that the lender waives its right to the deficiency. If the short sale agreement does not contain this waiver, the lender may file a lawsuit to obtain a deficiency judgment.
A deed in lieu of foreclosure occurs when a lender agrees to accept a deed to the property instead of foreclosing in order to obtain title. With a deed in lieu of foreclosure, the deficiency amount is the difference between the fair market value of the property and the total debt. (Learn more about deeds in lieu of foreclosure.)
In Delaware, a lender can get a deficiency judgment following a deed in lieu of foreclosure. To avoid a deficiency judgment with a deed in lieu of foreclosure, the agreement must expressly state that the transaction is in full satisfaction of the debt. If the deed in lieu of foreclosure agreement does not contain this provision, the lender may file a lawsuit to obtain a deficiency judgment against you.
To find the Delaware statutes, go to http://delcode.delaware.gov. The relevant statutes can be found in Title 10, Chapter 49.