In certain circumstances in Indiana, you might owe your mortgage lender money after a foreclosure sale of your home. This is called a deficiency. Read on to learn what a deficiency judgment is, whether your mortgage lender can collect one against you in Indiana, and what happens to the deficiency in a short sale or a deed in lieu of foreclosure.
(For more articles on Indiana foreclosure law and assistance for Indiana homeowners facing foreclosure, visit our Indiana Foreclosure Law Center.)
What Is a Deficiency After Foreclosure?
When a lender forecloses on a mortgage, the total debt owed by the borrower 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 borrower 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.)
Indiana Deficiency Judgments
Foreclosures in Indiana 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?)
In Indiana, a waiting period is required between the filing of the foreclosure lawsuit and the foreclosure sale. The waiting period is:
- three months if the mortgage was signed on or after July 1, 1975
- six months if the mortgage was signed on or after January 1, 1958, but before July 1, 1975; and
- twelve months if the mortgage was signed before January 1, 1958 (Ind. Code § 32-29-7-3).
Deficiency judgments are allowed in Indiana, but if the borrower waives the waiting period, the lender can’t get one (Ind. Code § 32-29-7-5).
Learn more about foreclosure procedures in Indiana.
Deficiency After a Short Sale in Indiana
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.)
There is no Indiana law that says a lender cannot get a deficiency judgment following a short sale. To avoid a deficiency judgment entirely, 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.
Deficiency After a Deed in Lieu of Foreclosure in Indiana
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.)
Often, a deed in lieu of foreclosure is deemed to fully satisfy the debt. However, lenders frequently look for new ways to recoup their losses and Indiana does not have a law that says the lender cannot get a deficiency judgment following a deed in lieu of foreclosure. This means that a lender may try to hold the borrower liable for a deficiency 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.
Indiana Foreclosure Law
To read the statutes that govern Indiana deficiency judgments, go to www.in.gov/legislative/ic/2010. Look in Title 32 (Property), Article 29 (Mortgages), Chapter 7 (Foreclosure. Redemption, Sale, Right to Retain Possession).