If your Michigan home sells at a foreclosure sale for less than you owe on your mortgage loan, you might still be liable to pay money afterward. That’s because, under Michigan law, the foreclosing bank is able to get a deficiency judgment. But, under specific circumstances, you can challenge the amount of the deficiency. (To learn about what to do—and what not to do—in a foreclosure, see Foreclosure Do's and Don'ts.)
In this article, you’ll learn what a deficiency judgment is, how the bank can get a deficiency judgment against you in Michigan, what happens to the deficiency in a short sale or a deed in lieu of foreclosure, and more.
In a foreclosure, the total debt that the borrower owes 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 $300,000. But your home sells for just $250,000 at the foreclosure sale. The deficiency is $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 against you, the bank 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 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 lender may get a deficiency judgment following a nonjudicial foreclosure by filing a lawsuit.
At the foreclosure sale, which is 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 in 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 new owner of the property.
But the borrower can contest the amount of the deficiency if:
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 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 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. (With a deed in lieu, the deficiency amount is the difference between the total debt and the fair market value of the property.)
In Michigan, 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.
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. If you can’t afford to hire a lawyer, a HUD-approved housing counselor is a good source of information.