If your Florida home sells at a foreclosure sale for less than you owe on your mortgage, you might get stuck with a hefty bill in the form of a deficiency judgment. In this article, you'll learn what a deficiency judgment is, how the foreclosing bank can get a deficiency judgment against you in Florida, and what happens to the deficiency in a short sale or a deed in lieu of foreclosure. (To learn what to do, and what not do, if you're facing a foreclosure, read Foreclosure Do's and Don'ts.)
In a foreclosure, the total debt that the borrower owes sometimes exceeds the foreclosure sale price. The difference between the total debt and the sale price is called a "deficiency."
Example. Say the total amount you owe on your mortgage loan—including outstanding principal, interest, fees, and costs—is $300,000. But your home sells for just $250,000 at the foreclosure sale. The deficiency is $50,000.
In some states, the foreclosing bank can seek a personal judgment (called a "deficiency judgment") against the debtor to recover the deficiency. Generally, once the bank gets a deficiency judgment against you, the bank may collect this amount—in our example, $50,000—through conventional collection methods, like garnishing your wages or levying your bank account. (Learn about different ways that creditors use to collect judgments.)
Foreclosures in Florida are judicial, which means the bank has to go through state court to foreclose. (Some other states permit nonjudicial foreclosures, which means the foreclosure happens without court involvement.)
In Florida, the bank may obtain a deficiency judgment as part of the foreclosure action if the borrower was personally served with the foreclosure complaint. The bank may also file a separate lawsuit against the borrower for a deficiency judgment unless the court denied one in the foreclosure action. (Fla. Stat. Ann. § 702.06).
The court has flexibility regarding the amount of the deficiency. (Fla. Stat. Ann. § 45.031(8), Fla. Stat. Ann. § 702.06). But the judgment generally can't exceed the difference between the judgment amount and the fair market value of the home as of the date of sale, particularly if the property is owner-occupied and residential. (Fla. Stat. Ann. § 702.06).
The statute of limitations for getting a deficiency judgment for residential properties with no more than four dwelling units is one year. The limitations period starts on the day after the clerk of court issues the certificate of title to the person or entity that bought the home at the foreclosure sale. (Fla. Stat. Ann. § 95.11). Typically, if no one files an objection to the sale, the clerk issues the certificate of title ten days after the certificate of sale. (Under Florida law, the court clerk must promptly file a certificate of sale after the foreclosure sale takes place.)
A short sale is when you sell your home for less than the total debt you owe, and the proceeds of the sale pay off a portion of the balance.
Florida doesn't have a law preventing a bank from getting a deficiency judgment after a short sale. However, if the property is owner-occupied and residential, the deficiency is limited to the difference between the outstanding debt and the fair market value of the property on the date of sale. (Fla. Stat. Ann. § 702.06).
To avoid a deficiency judgment entirely, a short sale agreement must expressly state that the bank waives its right to the deficiency. If the short sale agreement doesn't contain this waiver, the bank may file a lawsuit to get a deficiency judgment. Though, if the bank forgives the deficiency, you might face tax consequences.
A deed in lieu of foreclosure (deed in lieu) is when a bank agrees to accept a deed to the property instead of foreclosing to get the property's title. With a deed in lieu, the deficiency amount is the difference between the total debt and the fair market value of the property.
Often, a deed in lieu is deemed to satisfy the debt fully. But Florida doesn't have a law that says the bank can't get a deficiency judgment following this kind of transaction. So, a bank might try to hold the borrower liable for a deficiency following a deed in lieu.
To avoid a deficiency judgment, the agreement must expressly state that the transaction is in complete satisfaction of the debt. If the deed in lieu contract doesn't contain this provision, the bank may file a lawsuit to obtain a deficiency judgment. Again, if the debt is forgiven, you might have a tax liability.
The bank has one year to pursue a deficiency judgment after accepting a deed in lieu. (Fla. Stat. Ann. § 95.11).
Florida law says that the judge has discretion when entering a deficiency judgment. So, if you're facing a foreclosure and possible deficiency judgment in Florida, consider talking to a foreclosure lawyer. A lawyer might be able to successfully fight a deficiency judgment in court, negotiate a settlement to lower the deficiency, or help you avoid a deficiency judgment by arranging a loss mitigation option that fully satisfies your mortgage debt.
If you want more information about alternatives to foreclosure, a HUD-approved housing counselor is an excellent resource.