Deficiency Judgments After Foreclosure in New York

If your home in New York sells at a foreclosure sale for less than you owe on your mortgage loan, you might be on the hook to pay a deficiency judgment. However, under certain circumstances—like if the foreclosing bank doesn't go after a deficiency judgment within a specific amount of time following the foreclosure sale—you won't have to pay the deficiency balance. Also, even in cases where the bank does get a deficiency judgment, the court can limit the amount.

Read on to learn what a deficiency judgment is, when your mortgage bank can collect one against you in New York, and what happens to the deficiency in a short sale or a deed in lieu of foreclosure.

What Is a Deficiency Judgment?

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 mortgage loan—including outstanding principal, interest, fees, and costs—is $500,000. But your home sells for just $450,000 at the foreclosure sale. The deficiency is $50,000.

In some states, the bank can seek a personal judgment (called a "deficiency judgment") against the debtor to recover the deficiency. Generally, once the bank gets a deficiency judgment against you, it may collect this amount—in our example, $50,000—through conventional collection methods, like garnishing your wages or levying your bank account.

Deficiency Judgment Law in New York

Foreclosures in New York are judicial, which means the bank has to file a lawsuit in state court to foreclose. (In a nonjudicial foreclosure, the bank can foreclose without filing a suit.)

Deficiency Judgments Are Allowed

Under New York law, the bank may obtain a deficiency judgment against the borrower—subject to some limitations. (N.Y. Real Prop. Act. Law § 1371).

Time Limit to Request a Deficiency Judgment

The bank must ask for a deficiency judgment within 90 days after consummation of the foreclosure sale. (The sale is consummated when the deed is delivered to the purchaser.) This time period effectively acts as a statute of limitations. (N.Y. Real Prop. Act. Law § 1371(2)).

A request for a deficiency judgment is made at the same time the bank files a motion for an order confirming the sale. (N.Y. Real Prop. Act. Law § 1371(2)).

Fair Market Value Limitation

The deficiency is also limited by the fair market value of the property, which the court determines. (N.Y. Real Prop. Act. Law § 1371(2)).

Example: If the total debt is $500,000 and the bank bids $450,000 at the foreclosure sale and purchases the property, the deficiency is $50,000. Generally, this means the bank could get a deficiency judgment for $50,000 and then collect that amount from the borrower. But if the court determines that the fair market value of the property is really $475,000, the bank could get a deficiency judgment in the amount of just $25,000.

So, the amount of the deficiency is the total debt less the higher of the fair market value or the sales price.

Personal Service Is Required

A bank may obtain a deficiency judgment only if the complaint is personally served on the borrower or if the borrower enters an appearance in the foreclosure action. (N.Y. Real Prop. Act. Law § 1371(1)).

Deficiency Judgments After a Short Sale in New York

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.

New York doesn't have a law that prevents a bank from getting a deficiency judgment following a short sale. To avoid a deficiency judgment entirely, a short sale agreement must expressly state that the bank waives its right to the deficiency. If the short sale agreement 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 face tax consequences.

Deficiency Judgments After a Deed in Lieu of Foreclosure in New York

A deed in lieu of foreclosure (deed in lieu) is when a bank agrees to accept a deed to the property instead of foreclosing to get the property's title. With a deed in lieu, the deficiency amount is the difference between the total debt and the fair market value of the home.

In New York, a bank can get a deficiency judgment following a deed in lieu. To avoid a deficiency judgment with a deed in lieu, the agreement must expressly state that the transaction completely satisfies the debt. If the deed in lieu agreement doesn't contain this provision, the bank may file a lawsuit to obtain a deficiency judgment against you. Again, if the bank forgives all or some of the debt, you might have a tax liability.

Getting Help

If you're facing a New York foreclosure, consider talking to a foreclosure lawyer. A lawyer might be able to successfully fight a deficiency judgment, negotiate a settlement to lower the deficiency, or help you avoid a deficiency judgment by arranging a loss mitigation option that fully satisfies your mortgage debt.

If you want more information about alternatives to foreclosure, a HUD-approved housing counselor is an excellent resource.