Deficiency Judgment Laws in New York

You might face a deficiency judgment after a foreclosure in New York. But in New York, the lender must seek a deficiency judgment within a limited amount of time, and if the lender does seek one, the court can limit the judgment amount. Also, the lender can get a deficiency judgment only if it serves you notice of the lawsuit personally or you appear in the action.

What Is a Deficiency in a Foreclosure?

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."

Example of a Mortgage 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 $900,000, but the home sells to the lender at a foreclosure sale for a credit bid of $850,000, the deficiency is $50,000.

What Is a "Deficiency Judgment" After a Foreclosure Sale?

When a foreclosure sale results in a deficiency, the lender may get a "deficiency judgment" (a personal judgment) against the borrower for the deficiency amount in many states, including New York.

In some states, the lender may ask for 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 You Won't Face a Deficiency Judgment

If the sale price equals or exceeds the mortgage debt amount, you're off the hook for a deficiency judgment because no deficiency exists. And if the sale results in excess proceeds, you might be entitled to that extra money following the foreclosure auction.

But, if any junior liens were on the home, like a second mortgage or 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).

State Law Sometimes Limits Deficiency Judgments

State law sometimes imposes limits on deficiency judgments. Some states restrict deficiency judgment amounts, such as by requiring that the borrower get credit for the home's fair market value if the foreclosure sale price is less. The property's fair market value is substituted for the foreclosure sale price when calculating the deficiency amount.

Other states set time limits for how long lenders get to seek a deficiency judgment against a borrower, typically ranging from three months to one year after the foreclosure sale. Various states require specific procedural requirements to get a deficiency judgment, while some don't allow deficiency judgments in certain circumstances, like after nonjudicial foreclosures.

What Are the Legal Requirements for a Deficiency Judgment in New York?

Foreclosures in New York are judicial, which means the lender must foreclose through the state court system. To begin the foreclosure, the foreclosing lender files a lawsuit (a "complaint") against the borrower. If you don't answer the suit, the lender will ask the court for, and probably receive, a default judgment, allowing it to hold a foreclosure sale.

But if you choose to respond to the foreclosure lawsuit, the case will go through the litigation process. The lender might then ask the court to grant summary judgment. A summary judgment motion asks that the court grant judgment in favor of the lender because there's no dispute about the critical aspects of the case. If the court grants summary judgment for the lender—or you lose at trial—the judge will enter a judgment and order your home sold at auction.

As part of the foreclosure, if the sale fails to bring in enough money to pay off the debt, the lender may get a deficiency judgment—subject to some limitations. (N.Y. Real Prop. Act. Law § 1371).

Time Limit for Requesting a Deficiency Judgment in New York

The lender 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 deadline effectively acts as a statute of limitations. (N.Y. Real Prop. Act. Law § 1371(2)).

Typically, the lender requests a deficiency judgment when it files a motion for an order confirming the sale. (N.Y. Real Prop. Act. Law § 1371(2)).

Personal Service Is Required

The lender may obtain a deficiency judgment only if you are personally served the summons or enter an appearance in the foreclosure action. (N.Y. Real Prop. Act. Law § 1371(1)).

How to Calculate the Amount of a Deficiency Judgment in New York

The deficiency is limited by the property's fair market value, which the court determines. So, the deficiency judgment amount is the borrower's total debt less the market value as determined by the court or the sale price of the property, whichever is higher. (N.Y. Real Prop. Act. Law § 1371(2)).

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 the court decides that your home's fair market value is $875,000, the lender could get a deficiency judgment for just $25,000 rather than $50,000.

How Lenders Collect Deficiency Judgments

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.

Even if your lender gets a deficiency judgment, you might be able eliminate your liability for a deficiency judgment, like many other dischargeable debts, in a Chapter 7 or Chapter 13 bankruptcy.

Can You Avoid a Deficiency Judgment in New York?

Again, if you lose your home to foreclosure and the court orders you to pay a deficiency judgment, you might be able to use bankruptcy to eliminate the debt. Or you might have a defense to the deficiency.

What Defenses Are Available to Borrowers Who Are Sued for a Deficiency Judgment in New York?

Some possible defenses to a deficiency judgment in New York are:

• You weren't personally served the summons and complaint and didn't appear in the action.
• The plaintiff didn't make its motion for a deficiency judgment within 90 days after the date the buyer received the deed.
• The plaintiff didn't properly serve you the motion for the deficiency judgment. The plaintiff must serve you personally unless the judge permits them to serve you differently.
• The home's fair market value was less than the plaintiff says it was at the time of the sale. (You'll have to provide proof, such as an appraisal.)

What Happens to Second Mortgages, HELOCs, and Other Junior Liens?

Generally, when a senior lienholder forecloses, any junior liens—like second mortgages and HELOCs, among others—are also foreclosed, and those junior lienholders lose their security interest in the real estate. In this situation, junior lienholders are sometimes called "sold-out junior lienholders." But that doesn't mean that you don't still owe money to junior lienholders.

Suppose a junior lienholder, like a second mortgage lender, is sold out in this manner, and the foreclosure sale proceeds weren't sufficient to pay what you owe to that junior lienholder. In that case, the junior lienholder could sue you personally on the loan's promissory note. So, if the equity in your home doesn't cover second and third mortgages, for example, you might face lawsuits from those lenders to collect the balance of those loans.

Getting Foreclosure Help in New York

If you have questions about New York's foreclosure process or want to learn about potential defenses to a foreclosure, such as a statute of limitations defense, 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 a good idea. 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).