If you go through a foreclosure in New Jersey, the foreclosure auction could result in a 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."
In most states, including New Jersey, if a foreclosure sale results in a deficiency, the lender may get a "deficiency judgment" (a personal judgment) against the borrower for the deficiency amount. But in New Jersey, the lender must seek a deficiency judgment in a separate action within a limited time after the foreclosure. If the lender does seek one, the court can limit the judgment amount if you dispute it.
When a foreclosure sale price doesn't bring in enough money to pay off the borrower's mortgage loan, the difference between the total debt and the sale price is called a "deficiency."
For example, if your total mortgage debt is $900,000, but the home sells at a foreclosure sale for a bid of $850,000, the deficiency is $50,000.
If state law allows it, the lender can seek a personal judgment against the borrower to recover the deficiency when there is one. This kind of money judgment is called a "deficiency judgment."
Some states allow the lender to request a deficiency judgment as part of a judicial foreclosure process. In other states, the lender has to file a separate lawsuit against the borrower after the foreclosure to get a deficiency judgment.
When the sale price equals or exceeds the mortgage debt amount, you're off the hook because no deficiency exists. In fact, you might be entitled to that extra money following the foreclosure auction. But if you had a second mortgage, HELOC, or a creditor recorded a judgment lien against the property, those parties get the funds to satisfy the amount they're owed. Then, any proceeds left over after paying off these liens belong to you (the foreclosed homeowner).
Generally, once a lender gets a deficiency judgment, it may collect this amount (in the example above, $50,000) from the borrower using regular collection methods, like garnishing wages or levying a bank account.
To get a deficiency judgment against you, the lender must first foreclose. (N.J. Stat. Ann. § 2A:50-2). Foreclosures in New Jersey are judicial, which means the lender must foreclose through the state court system.
After the foreclosure, if the sale fails to bring in enough money to pay off the debt, the lender may file a separate lawsuit against you to get a deficiency judgment.
To get a deficiency judgment after a New Jersey foreclosure, the lender must file its separate lawsuit within three months from the foreclosure sale date or, if confirmation of the sale is required, from the date of the confirmation of the sale. (N.J. Stat. Ann. §§ 2A:50-1 through 2A:50-2.1). This three-month period basically acts as a statute of limitations.
You have a defense if the lender doesn't file a suit for a deficiency judgment by the deadline.
If you think the home sold at the foreclosure sale for less than its fair market value, you may dispute the deficiency amount by answering the lender's suit and introducing evidence regarding the property's fair market value. The court will then determine the home's value and limit the deficiency judgment to the difference between the debt and the fair market value as of the foreclosure sale date. (Or, the parties to the suit may agree to hire three appraisers, and the court will accept their determination about the home's fair market value.) (N.J. Stat. Ann. § 2A:50-3).
For example, If your total mortgage debt is $900,000 and the lender's winning bid at the foreclosure sale is $850,000, the deficiency is $50,000. But if you respond to a deficiency judgment suit disputing the deficiency amount, and the court decides that your home's fair market value is really $875,000, the lender's deficiency judgment would be limited to $25,000 rather than $50,000.
However, filing an answer to dispute the deficiency amount has a downside: Generally, if the lender gets a deficiency judgment, you get six months after the judgment to bring an action to redeem the property. But if you dispute the deficiency amount, you lose this right of redemption. (N.J. Stat. Ann. § 2A:50-4, N.J. Stat. Ann. § 2A:50-5).
Even if your lender gets a deficiency judgment, you can probably eliminate your liability for a deficiency judgment, like many other dischargeable debts, in a Chapter 7 or Chapter 13 bankruptcy.
Or you might be able to raise a defense to the deficiency, such as a deficiency judgment is prohibited because the lender missed the deadline to file a lawsuit for one.
If you have questions about New Jersey's foreclosure process or want to learn about potential defenses to a foreclosure and possibly fight the foreclosure in court, consider talking to a foreclosure attorney.
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. You can also call the Homeownership Preservation Foundation (HOPE) Hotline, open 24 hours a day, seven days a week, at 888-995-HOPE (4673).