If your home sells at a foreclosure sale in Indiana for less than you owe the lender, you might still owe money after the sale. (The difference between the total debt and the sale price is called a deficiency.)
Read on to learn what a deficiency judgment is, when your lender can collect one against you in Indiana, and what happens to a 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, see Foreclosure Do's and Don'ts).
In a foreclosure, the total debt the borrower owes to the lender sometimes exceeds the foreclosure sale price. Again, the difference between the total debt and the sale price 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 Deficiency Judgments: Will You Still Owe Money After the Foreclosure?)
Foreclosures in Indiana are judicial, which means the lender has to go through state court. (To learn more about the difference between judicial and nonjudicial foreclosures, 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. (For older mortgages, the waiting period is longer under state law.) (Ind. Code § 32-29-7-3.)
The lender may generally seek a deficiency judgment against the borrower in an Indiana foreclosure, but not if the borrower waives the waiting period (in writing) and the lender agrees. (Ind. Code § 32-29-7-5, § 32-30-10-7.)
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 balance. (Learn more about short sales to avoid foreclosure.)
There is no Indiana law that says a lender can't 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. (Though, if the lender forgives the deficiency amount and issues you a 1099-C, you might owe taxes on the forgiven amount. To learn more, see Will You Owe Income Taxes on Forgiven Mortgage Debt?)
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 can't 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. (Again, if the debt is forgiven, you might have tax liability.)
To read the statutes that govern Indiana deficiency judgments, go to the Indiana General Assembly's webpage. Then, look in Title 32 (Property), Article 29 (Mortgages), Chapter 7 (Foreclosure. Redemption, Sale, Right to Retain Possession) of the Indiana Code. (To learn how to look up foreclosure laws, see How to Find the Foreclosure Laws in Your State.)
If you’re facing a foreclosure in Indiana, consider talking to a foreclosure lawyer. A lawyer can tell you more about how the foreclosure process in Indiana 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.