Deficiency Judgment Laws in Alabama

Can your lender get a deficiency judgment against you after a foreclosure in Alabama?

By , Attorney

If you go through a foreclosure in Alabama, the foreclosure sale could result in a deficiency. When the foreclosure sale price doesn't cover the borrower's mortgage debt balance, the difference between the total debt and the sale price is called a "deficiency."

In most states, if a foreclosure sale results in a deficiency, the lender may get a deficiency judgment against the borrower for the deficiency amount. In Alabama, the lender may obtain a deficiency judgment against the borrower by filing a lawsuit after a nonjudicial foreclosure.

What Is a Deficiency in an Alabama Foreclosure?

Again, when the foreclosure sale price doesn't bring in enough money to pay off the borrower's mortgage loan, the difference between the total debt and the sale price is called a "deficiency."

Example of a Mortgage Deficiency in an Alabama Foreclosure

If you default on your mortgage loan, the lender can use a legal process (a foreclosure) to sell your home to repay the debt. After the lender completes all the legal procedures for foreclosure, the final step in a judicial or nonjudicial foreclosure is the foreclosure sale, where the home is sold to a new owner at a public auction.

The foreclosing lender submits the first bid at the sale, which is a "credit bid." With a credit bid, the lender gets a credit in the amount of the borrower's debt. Generally, the lender makes the highest bid at the sale and becomes the new owner of the property when no one else bids.

The lender can bid up to the total amount of the debt, including foreclosure fees and costs, or it might bid less. Lenders regularly bid less than the total amount of a borrower's mortgage debt at foreclosure sales. Once again, the difference between the total debt and a lesser bid is the deficiency.

For example, if your total mortgage debt is $400,000, but the home sells to the lender at a foreclosure sale for a credit bid of $350,000, the deficiency is $50,000.

What Is a "Deficiency Judgment" After a Foreclosure Sale?

If state law allows it, the lender can seek a personal judgment against the borrower to recover the deficiency if one exists. This kind of money judgment is called a "deficiency judgment."

How Do Lenders Get Deficiency Judgments?

In some states, the lender asks for a deficiency judgment as part of a judicial foreclosure process. In other states, the lender must file a lawsuit against the borrower after the foreclosure to get a deficiency judgment.

Are Deficiency Judgments After Home Foreclosures Allowed in All the States?

State law sometimes prohibits or limits deficiency judgments. And some states restrict deficiency judgment amounts. Other states set a deadline for the lender to get a deficiency judgment (a "statute of limitations").

Do Foreclosures Always End With a Deficiency?

If the sale price equals (or exceeds) the mortgage debt amount, you're off the hook because there's no deficiency. If the sale results in excess proceeds, you might be entitled to that extra money after the foreclosure auction.

However, if the property had any junior liens recorded against it, such as a second mortgage or home equity loan, or a creditor recorded a judgment lien against the property, those parties can get the excess funds to pay off the amount they're owed. Then, any proceeds left over after paying off these liens belong to the foreclosed homeowner.

How Lenders Collect Deficiency Judgments

Generally, once a lender gets a deficiency judgment, it may collect this amount (in the example above, $50,000) from the borrower using regular collection methods, like garnishing wages or levying a bank account.

Can You Avoid a Deficiency Judgment in Alabama?

Even if your lender gets a deficiency judgment, you can probably eliminate your liability for a deficiency judgment, like many other dischargeable debts, in a Chapter 7 or Chapter 13 bankruptcy. Or you might be able to raise a defense to the deficiency, such as the lender's bid at the foreclosure sale was so shockingly low that it creates a presumption of unfairness.

Will My Lender Sue Me for a Deficiency Judgment?

Even if your lender has the right under state law to go after you for a deficiency judgment, it might decide not to do so—especially if you don't have many assets to satisfy the judgment. The lender might decide it isn't worth the expense and effort of getting a deficiency judgment.

Still, you should know whether your lender can potentially pursue you for a deficiency after a foreclosure. Also, even if the lender decides not to sue you for a deficiency judgment, it could later sell the debt to a debt buyer who might file a lawsuit against you for the deficiency later on.

How Alabama Foreclosures Work

Most foreclosures in Alabama are nonjudicial, which means the lender doesn't have to go through state court to foreclose. (The lender could alternatively choose to foreclose through the state court system, called a "judicial foreclosure." However, in states with an available nonjudicial process, lenders almost always choose this route rather than pursuing a judicial foreclosure because an out-of-court foreclosure is relatively quick and inexpensive.)

Because Alabama foreclosures are ordinarily nonjudicial, this article focuses on laws on that process.

Does Alabama Allow Deficiency Judgments?

Alabama law has no significant restrictions on deficiency judgments following nonjudicial foreclosures. But lenders owe borrowers a duty of fairness and good faith in coming up with their credit bids at foreclosure sales.

So, lenders can't make an unreasonably low bid that's shockingly less than the property's fair market value to pursue a large deficiency judgment against the borrower. (Mt. Carmel Estates, Inc., et al. v. Regions Bank, 853 So.2d 160 (Supreme Court of Alabama 2002)).

Getting Foreclosure Help in Alabama

If you have questions about Alabama's foreclosure process or want to learn about potential defenses to a foreclosure and possibly fight the foreclosure in court, consider talking to a foreclosure attorney. Talking to a HUD-approved housing counselor about different loss mitigation options is also a good idea.

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