If your Maryland home sells at a foreclosure sale for less than you owe on your mortgage loan, you might get stuck with a substantial bill afterward in the form of a deficiency judgment. In this article, you’ll learn what a deficiency judgment is, how the bank can get a deficiency judgment against you in Maryland, and what happens to the deficiency in a short sale or a deed in lieu of foreclosure.
In a foreclosure, the borrower's total debt 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 home loan—including outstanding principal, interest, fees, and costs—is $500,000. But your home sells for just $450,000 at the foreclosure sale. What you owe minus the sale proceeds equals the deficiency: $500,000 - $450,000 = $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, depending on state law, once the bank gets a deficiency judgment, it 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.)
Most foreclosures in Maryland are nonjudicial, but with court supervision. In this type of foreclosure, the court must ratify the sale. After ratification, a court-appointed auditor determines the distribution of the sale proceeds and files a report. If a deficiency exists, the bank may file a motion for a deficiency judgment within three years after a court ratifies the auditor’s report. (Maryland Rule 14-216(b), Md. Code Ann. [Real Prop.] § 7-105.17).
State law used to say that a creditor could pursue a deficiency judgment within 12 years. But as of July 1, 2014, this time period was reduced to three years.
While Maryland shortened its statute of limitations for filing a deficiency action from 12 to three years, it didn't modify the statutory period to collect the judgment, which remains at 12 years. And the bank may extend this time period for another 12 years before the period ends. (Maryland Rule 2-625).
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. 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.)
In Maryland, the bank may get a deficiency judgment after a short sale or deed in lieu. To avoid a deficiency judgment with either of these kinds of transactions, the agreement must expressly state that the bank waives its right to the deficiency. If the contract 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 have tax consequences.
This article summarizes deficiency judgment laws in Maryland, with citations to statutes so you can learn more. To read the statutes, look at Maryland Rules 14-201 through 14-218, as well as Md. Code Ann. [Real Prop.] §§ 7-101 through 7-111. Statutes change, so checking them is always a good idea.
How courts and agencies interpret and apply the law can also change. And some rules can even vary within a state. These are just some of the reasons to consider consulting an attorney if you’re facing a foreclosure.
If you’re facing a foreclosure in Maryland, consider consulting with a foreclosure attorney to get information about the foreclosure process, including whether you have any defenses to the foreclosure and whether you're likely to face a deficiency judgment in your circumstances. A foreclosure attorney can also explain various options that might be available to prevent a foreclosure. If you can’t afford to hire a lawyer, a HUD-approved housing counselor is a good source of information.