If your North Carolina home sells at a foreclosure sale for less than you owe on your mortgage loan, you might get stuck with a hefty bill afterward. That's because, under North Carolina law, the foreclosing lender is generally able to get a deficiency judgment. But in some instances, state law prohibits the lender from getting this kind of judgment and the amount of the deficiency can be limited. (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, under what circumstances the lender can’t get a deficiency judgment against you in North Carolina, and what happens to the deficiency in a short sale or a deed in lieu of foreclosure.
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 lender can seek a personal judgment (called a “deficiency judgment”) against the debtor to recover the deficiency. Usually, once the lender gets a deficiency judgment against you, the lender may collect this amount—in our example, $50,000—through conventional collection methods, like garnishing your wages or levying your lender account. (Learn about different ways that creditors use to collect judgments.)
Foreclosures in North Carolina can be nonjudicial, which means the lender does not have to go through state court. Judicial foreclosures are allowed too. In a judicial foreclosure, the lender forecloses through the state court system.
Because most foreclosures in North Carolina are nonjudicial, this article focuses on that process.
In North Carolina, a lender may obtain a deficiency judgment by filing a lawsuit against you after a nonjudicial foreclosure.
Under North Carolina law, a deficiency judgment isn't allowed if the seller financed the purchase of the property. (N.C. Gen. Stat. § 45-21.38).
If the lender (or current loan owner) purchased the home at the foreclosure sale and the sale price was less than the fair market value of the home, the borrower can challenge the deficiency amount. Under North Carolina law, if the borrower can show that the fair market value of the property is more than the sale price, then the borrower is only liable for the difference between the fair market value and the total debt. (N.C. Gen. Stat. § 45-21.36).
Example. Again, say the borrower owed $300,000 to the lender. If the lender bought the home at foreclosure for $250,000, but the borrower proves to a court that the fair market value of the home was $275,000. The deficiency will be reduced to $25,000 ($300,000 - $275,000) from $50,000.
Because most foreclosure sales end with the lender getting title to the property and with a deficiency, you might be able to fight a deficiency judgment by raising a defense based on fair market value asserted under this statute.
In a few situations in North Carolina, the lender is barred from seeking a deficiency judgment after foreclosure. For instance, a deficiency judgment generally isn’t allowed if your mortgage is nontraditional, meaning it allows you to defer payment of principal or interest and provides for negative amortization (like Pick-a-Payment or Option ARM loans) or is a rate spread home loan (where the annual percentage rate exceeds a certain threshold), and the mortgage secures your principal residence. (N.C. Gen. Stat. § 45-21.38A). Check the law or talk to a local foreclosure attorney for more information.
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 lender 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 property.)
In North Carolina, the lender 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 lender waives its right to the deficiency. If the contract doesn’t contain this waiver, the lender may file a lawsuit to get a deficiency judgment. Though, if the lender forgives the deficiency, you might have tax consequences.
If you believe your home sold for less than its true value at a foreclosure sale, and you want to challenge a deficiency lawsuit, consider talking to a foreclosure attorney.
If a lender already obtained a deficiency judgment against you, you might be able to discharge (eliminate) your liability for the debt by filing for bankruptcy. While filing for bankruptcy just to discharge a deficiency judgment might not make sense, if you have other debts that a bankruptcy would eliminate, it might be a good option for you. To find out if filing for bankruptcy is appropriate in your circumstances, consider talking to a bankruptcy lawyer.