In Connecticut, if you go through foreclosure and the sale price is not enough to cover the balance of your mortgage, your 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 Connecticut, and what happens to the deficiency in a short sale or a deed in lieu of foreclosure in Connecticut. (For more articles on foreclosure in Connecticut, visit our Connecticut Foreclosure Law Center.)
When a lender forecloses, 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.
Example. Say the total debt owed is $200,000, but the home sells for $150,000 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?)
Foreclosures in Connecticut are judicial, which means the lender has to go through state court to foreclose. (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 Connecticut, lenders may foreclose through one of two judicial procedures:
Deficiency judgments are allowed in strict foreclosures. In a strict foreclosure, the lender may seek a deficiency judgment against the borrower within 30 days after the expiration of the redemption period. (Learn more about the redemption period in a Connecticut strict foreclosure.) The deficiency judgment is limited to the difference between the total debt minus the fair market value of the property, as determined by the judge. (Conn. Gen. Stat. § 49-14).
Deficiency judgments are also allowed in decree of sale foreclosures. However, if the property sells for less than the appraised value, the lender must first credit the borrower with one-half the difference between the selling price and the appraised value (Conn Gen. Stat. § 49-28).
Example. Continuing with our example above, the borrower owes $200,000 on the mortgage, but the home sold for $150,000 at the foreclosure sale, which leaves a $50,000 deficiency. The appraised value of the property is $180,000. The difference between the appraised value and the foreclosure sale price is $30,000. Because the property sold for less than the appraised value, divide $30,000 in half (which is $15,000) and deduct that amount from $50,000 to come up with the amount that the lender is entitled to receive. In this example, the deficiency judgment would be $35,000.
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.
In Connecticut, 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.
In Connecticut, 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 Connecticut statutes, go to the Connecticut Legislature’s website. Then click on “Statutes” and “Browse Statutes” to find the Table of Contents. The relevant statutes can be found in Volume 12, Title 49, Chapter 846.