In Arizona, if you go through a foreclosure and the sale price is not enough to cover the balance of your mortgage debt, your lender can generally come after you for the "deficiency." But Arizona law places limits on the amount of the deficiency judgment. And in some circumstances Arizona law prohibits the lender from getting a deficiency judgment altogether.
Read on to learn what a deficiency judgment is, when your mortgage lender can collect one against you in Arizona, and what happens to the deficiency in a short sale or a deed in lieu of foreclosure in Arizona.
When a lender forecloses, the total debt the borrowers owe to the lender sometimes exceeds the foreclosure sale price. The difference between the sale price and the total debt is called a deficiency.
Example. Say the total debt owed is $400,000, but the home sells for $350,000 at the foreclosure sale. The deficiency is $50,000.
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 Deficiency Judgments: Will You Still Owe Money After the Foreclosure?)
Most foreclosures in Arizona are nonjudicial, which means the lender does not have to go through state court to get one so long as the deed of trust contains a power of sale clause.
Some foreclosures in Arizona are judicial. In a judicial foreclosure, the lender must foreclose through the state court system. (In states that allow nonjudicial foreclosures, lenders sometimes, in some circumstances, decide to go through the courts instead. Find out why by reading Why Would a Lender Choose a Judicial Foreclosure Instead of a Nonjudicial Foreclosure?)
Deficiency judgments are generally allowed. In Arizona, the lender can obtain a deficiency judgment by filing a separate lawsuit within 90 days following a nonjudicial trustee’s sale or as part of a judicial foreclosure.
Some deficiency judgments are prohibited. However, subject to some exceptions (like if the real property contains a dwelling that was never substantially completed or never used as a dwelling) no deficiency is allowed after a nonjudicial foreclosure if the property is:
Also, no deficiency is allowed in a judicial foreclosure (again, subject to some exceptions, like when the real property contains a dwelling that was never substantially completed or never used as a dwelling) if:
Limitation on deficiency judgments. Deficiency judgments, if available, are limited to the lesser of:
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.)
There is no Arizona law that says a lender cannot 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. Though, if the lender forgives the deficiency, you might face tax consequences. The law provides several exceptions, however, in which the forgiven amount isn't taxable, like if the debt was nonrecourse.
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.)
There is no Arizona law that says a lender can't 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. (Again, if the debt is forgiven, you might have a tax liability.)
To find the Arizona statutes that govern foreclosures, go to the Arizona State Legislature webpage. The relevant statutes are located in Title 33, Chapters 6 and 6.1 in §§ 33-741 through 33-749 and §§ 33-801 through 33-821.
If you’re facing a foreclosure in Arizona, consider talking to a foreclosure lawyer. A lawyer can tell you more about how the foreclosure process in Arizona works and whether you have any possible defenses to the foreclosure. If you want more information about alternatives to foreclosure, a HUD-approved housing counselor is an excellent resource.
For more articles on foreclosure procedures in Arizona and assistance for struggling Arizona homeowners, visit our Arizona Foreclosure Law Center.