In some states, including Michigan, a foreclosing bank can seek a personal judgment, called a "deficiency judgment," against the debtor to recover a deficiency following a foreclosure sale. Generally, once the bank gets a deficiency judgment against you, the bank may collect this amount through conventional collection methods, like garnishing your wages or levying your bank account.
But, under specific circumstances, you can challenge the deficiency.
When the foreclosure sale price doesn't cover the borrower's mortgage debt balance, the difference between the total debt and the sale price is called a "deficiency."
If you default on your mortgage loan, the lender can go through a legal process called "foreclosure" to sell your home to repay the outstanding debt. After the lender fulfills all the legal requirements for foreclosure, the final step in a judicial or nonjudicial foreclosure is the foreclosure sale, where the home is sold to a new owner at a public auction.
The foreclosing lender submits the first bid at the sale, a "credit bid." With a credit bid, the lender gets a credit in the amount of the borrower's debt. Most of the time, the lender makes the highest bid at the sale and becomes the new owner of the property because no one else bids. The lender can bid up to the total amount of the debt, including foreclosure fees and costs, or it might bid less. Lenders regularly bid less than the total amount of a borrower's mortgage debt at foreclosure sales.
Again, the difference between the total debt and a lesser bid is the deficiency. For example, if your total mortgage debt is $500,000, but the home sells to the lender at a foreclosure sale for a credit bid of $450,000, the deficiency is $50,000.
Most foreclosures in Michigan are nonjudicial, which means the bank does not have to go through court. Judicial foreclosures are allowed, too. In a judicial foreclosure, the bank forecloses through the state court system.
In Michigan, the foreclosing bank may get a deficiency judgment following a nonjudicial foreclosure by filing a lawsuit.
At the foreclosure sale, an auction, the foreclosing bank will usually make a "credit bid." With a credit bid, the bank bids the debt that the borrower owes. Basically, the bank gets a credit for this amount. The bank can bid the full amount of the debt, including foreclosure fees and costs, or it might bid less. If the bank is the highest bidder at the sale, it becomes the property's new owner.
The borrower can contest the deficiency if the bank was the purchaser at the foreclosure sale and
If you can prove to the court that one of these circumstances applies, you can reduce or eliminate your liability for the deficiency.
If the bank chooses to pursue a judicial foreclosure, it may obtain a deficiency judgment as part of the judicial foreclosure process. (Mich. Comp. Laws § 600.3150). As part of the foreclosure, that court may fix a minimum sale price that a buyer must bid for the property. (Mich. Comp. Laws § 600.3155).
A "short sale" is when you sell your home for less than the total debt you owe, and the sale proceeds 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. (With a deed in lieu, the deficiency amount is the difference between the total debt and the property's fair market value.)
The bank may get a deficiency judgment in Michigan after a short sale or deed in lieu. The agreement must expressly state that the bank waives its right to the deficiency to avoid a deficiency judgment with either of these transactions. The bank may sue for a deficiency judgment if the contract doesn't contain this waiver. However, you might have tax consequences if the bank forgives the deficiency.
If you're facing a foreclosure in Michigan and want to learn more about the process, including whether you have any defenses to the action, consider consulting with a foreclosure attorney. A foreclosure attorney can also explain various options that might be available to prevent a foreclosure.
Talking to a HUD-approved housing counselor about different loss mitigation options is also good. You can use the Consumer Financial Protection Bureau's Find a Counselor tool to get a list of HUD-approved housing counseling agencies in your area.