In Maryland, if you go through foreclosure and the sale price is not enough to cover the balance of your debt, 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 Maryland, and what happens to the deficiency in a short sale or a deed in lieu of foreclosure in Maryland. (To learn what to do, and what not do, if you’re facing a foreclosure, read Foreclosure Do's and Don'ts.)
When a lender forecloses on a mortgage, 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 only 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?)
Most foreclosures in Maryland are nonjudicial (which means the lender does not have to go through state court to foreclose), but with court supervision. (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?)
Deficiency judgments are allowed in Maryland. The lender may file a motion for a deficiency judgment within three years after ratification of the auditor’s report. (Maryland Rule 14-216). (A separate law used to state that a creditor could pursue a deficiency based on a promissory note within 12 years. However, as of July 1, 2014, this time period was reduced to three years.)
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. (Learn more about short sales to avoid foreclosure.)
In Maryland, 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. Though, if the lender forgives the deficiency, you might face tax consequences.
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. (Learn more about deeds in lieu of foreclosure.)
In Maryland, 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. (Again, if the debt is forgiven, you might have a tax liability.) 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 read the statutes governing foreclosures in Maryland, go to www.lexisnexis.com/hottopics/mdcode and look at Maryland Rules 14-201 through 14-218, as well as Md. Code Ann. Real Prop. §§ 7-101 through 7-111.
If you’re facing a foreclosure in Maryland, consider talking to a foreclosure lawyer. A lawyer can tell you if you have any potential defenses to the foreclosure and might be able to defend you against a deficiency judgment, negotiate a settlement to lower the deficiency, or help you arrange a way to avoid a foreclosure that fully satisfies your mortgage debt.
If you want more information about alternatives to foreclosure, a HUD-approved housing counselor is an excellent resource.
For more articles on Maryland foreclosure law and Maryland programs designed to help homeowners avoid foreclosure, visit our Maryland Foreclosure Law Center.