In Michigan, if you go through foreclosure and the sale price is not enough to cover the balance of your mortgage, your lender can come after you for the "deficiency." Read on to learn what a deficiency judgment is, find out about your right to contest the deficiency, and get information about what happens to the deficiency after a short sale or a deed in lieu of foreclosure in Michigan.
When a lender forecloses, the total debt the borrower owes 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 sells for just $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 borrower by doing such things as garnishing the borrower’s wages or levying the borrower’s bank account. (Learn about methods that creditors can use to collect judgments.)
In Michigan, lenders may foreclosure by either a nonjudicial or judicial process. Most foreclosures in Michigan are nonjudicial, which means the lender does not have to go through state court to foreclose. (With a judicial foreclosure, the lender must foreclose through the state court system. 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?)
Deficiency judgments following nonjudicial foreclosures. In Michigan, the lender may get a deficiency judgment following a nonjudicial foreclosure. But the borrower can contest the amount of the deficiency if:
Deficiency judgments following judicial foreclosures. If the lender chooses to pursue a judicial foreclosure, it may obtain a deficiency judgment as part of the judicial foreclosure process.
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 after the first mortgage lender forecloses, you might 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.
There is no Michigan law that says a lender cannot 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. If the short sale agreement does not contain this waiver, the lender may later file a lawsuit to obtain a deficiency judgment.
If the lender agrees to forgive all or some of the deficiency, you might face tax consequences.
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.
Usually, 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 Michigan does not have a law that says the lender cannot get a deficiency judgment following a deed in lieu of foreclosure. This means that a lender might try to hold the borrower liable for a deficiency after the deed in lieu of foreclosure transaction is completed.
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 lender forgives some or all of the deficiency, you might face tax consequences. (To learn more, see Canceled Mortgage Debt: What Happens at Tax Time?)
The statutes governing Michigan foreclosures can be found in § § 600.3101 to 600.3185 and § § 600.3201 to 60.3285 of the Michigan Compiled Laws, which can be found on the official Michigan Legislative website.
If you want to contest the amount of the deficiency after your foreclosure, or have other questions about foreclosure in Michigan, consider contacting a local foreclosure attorney.