In a foreclosure, the total debt the borrower owes to the lender sometimes exceeds the foreclosure sale price. The difference between the total debt and the sale price is called a deficiency. Say the borrower's total debt is $300,000. But the home sells for only $250,000 at the foreclosure sale. The deficiency is $50,000. In some states, the lender can seek a personal judgment, called a "deficiency judgment," against the borrower 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 using typical collection methods, such as as garnishing wages or levying the borrower's bank account.
Louisiana law allows two types of judicial foreclosure processes: executory and ordinary. If you go through either type of foreclosure and the sale price isn't enough to cover the balance of your mortgage, your lender can come after you for the deficiency—but only if the lender follows certain procedures.
Foreclosures in Louisiana are either through an executory proceeding or judicial. With both types of foreclosure, the process goes through court. The most common judicial foreclosure process in Louisiana is an executory proceeding. With this type of foreclosure, in the mortgage document, the homeowner has "confessed to judgment" in case of a default. If the homeowner then defaults, the foreclosing lender files a foreclosure petition with the court, along with a copy of the mortgage and other important loan documents attached, and the court summarily orders the property seized and sold. The homeowner's only remedy to fight the foreclosure is to appeal or bring a lawsuit asking the court to stop the proceeding. (La. Code Civ. Proc. Ann. Arts. 2634, 2638.)
Ordinary judicial foreclosures can occur as well. In this type of foreclosure, the lender goes through the normal civil litigation process to obtain a court judgment ordering a foreclosure sale. (La. Code Civ. Proc. Ann. Art. 3722.)
In either type of foreclosure proceeding in Louisiana, the court may grant a deficiency judgment, provided that the property was appraised before the sale. (La. Code Civ. Proc. Ann. Art. 2771.)
To get a deficiency judgment with an executory proceeding, the lender must either:
In an ordinary foreclosure proceeding, the deficiency judgment is obtained as part of that action.
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 mortgage holder has been sold-out in this manner, that junior mortgage holder can sue you personally on the promissory note. So, if the equity in your home doesn't cover second and third mortgages, you might face lawsuits from those lenders to collect the balance of the loans.
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. To avoid a deficiency judgment with a short sale, the agreement between you and the lender must expressly state that the lender waives its right to the deficiency. If the short sale agreement doesn't contain this waiver, the lender may file a lawsuit to obtain a deficiency judgment.
Though, if the lender forgives some or all of the deficiency amount and issues you a 1099-C, you might owe taxes on the forgiven amount.
A "deed in lieu of foreclosure" is when the lender agrees to accept a deed to the property instead of foreclosing to obtain title. With a deed in lieu of foreclosure, the deficiency amount is the difference between the total debt and the property's fair market value.
Often, a deed in lieu of foreclosure is deemed to fully satisfy the debt. But lenders frequently look for new ways to recoup their losses and Louisiana doesn't have a law that says the lender can't get a deficiency judgment following a deed in lieu of foreclosure. So, your lender might try to hold you 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 doesn't have this provision, the lender may file a lawsuit to get a deficiency judgment. Again, if the debt is forgiven, you might have tax liability.
To find the Louisiana statutes, go to the State Legislature's webpage. Click on "Laws," then select "Table of Contents" (on the left side of the screen) and click on "Code of Civil Procedure." The relevant statutes are in 2631 through 2772 (which cover executory proceedings) and 3721 through 3753 (which cover judicial proceedings).
Also, you might want to review La. Rev. Stat. 13:4106 and 4107 (the Deficiency Judgment Act). To find the Louisiana Revised Statutes, follow the steps above, but click on "Revised Statutes" rather than "Code of Civil Procedure." The statutes are located in Title 13. (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 Louisiana, consider talking to a foreclosure lawyer. A lawyer can tell you more about how the foreclosure process in Louisiana 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.