In North Carolina, if you go through foreclosure and the sale price is not enough to cover the balance of your mortgage, your lender can come after you for the "deficiency." However, North Carolina law limits the amount of the deficiency judgment and in certain circumstances the lender is prohibited from getting a deficiency judgment altogether. (To learn about what to do, and what not to do, in a foreclosure, see Foreclosure Do's and Don'ts.)
Read on to learn what a deficiency judgment is and when your mortgage lender can collect one against you in North Carolina.
When a lender forecloses, the total debt owed by the borrowers to the lender frequently exceeds the foreclosure sale price. The difference between the sale price and the total debt is called a deficiency.
Example. If the total debt owed is $250,000, but the home only sells for $200,000 at the foreclosure sale, the deficiency is $50,000.
In some states, the lender can seek a personal judgment against the debtor to recover the deficiency. Generally, once the lender gets a deficiency judgment, the lender may collect this amount (in our example, $50,000) from the borrowers by doing such things as garnishing wages or levying the borrowers’ bank account. In North Carolina, however, judgment creditors cannot collect through wage garnishment. (Read about the rules for wage garnishment in North Carolina.)
(To learn more about deficiency judgments in the foreclosure context, see our Deficiency Judgments After Foreclosure area.)
In North Carolina, foreclosures can be conducted either judicially or nonjudicially. Most foreclosures in the state are nonjudicial, which means the lender does not have to go through state court to get one. In judicial states, the lender must foreclose through the state court system. (To learn more about the difference between judicial and nonjudicial foreclosure, and the procedures for each, see Will Your Foreclosure Take Place In or Out of Court?)
In North Carolina, a lender may obtain a deficiency judgment following foreclosure. However, there is an exception to this general rule. The lender cannot get a deficiency judgment if the mortgage was a seller financed, purchase money mortgage. (N.C. Gen. Stat. § 45-21.38.)
If the lender 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. 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. Say the borrower owed $600,000 to the bank. If the bank bought the home at foreclosure for $500,000, but the borrower proves that the fair market value of the home was $550,000. The deficiency will be reduced to $50,000 ($600,000 - $550,000) from $100,000.
Generally, when a senior lienholder forecloses, any junior liens (these would include second mortgages and HELOCs, among others) are also foreclosed and those junior lienholders lose their security interest in the real estate. If a junior lienholder has been sold-out in this manner, that junior lienholder can sue you personally on the promissory note. This means that if the equity in your home doesn’t cover second and third mortgages, you may face lawsuits from those lenders to collect the balance of the loans.
Learn more in our article What Happens to Liens and Second Mortgages in Foreclosure?
In a few situations in North Carolina, the lender might be barred from seeking a deficiency judgment after foreclosure. This happens if:
Check the law or talk to a local foreclosure attorney for more information.
The statutes governing foreclosures can be found in §§ 45-21.1 to 45-21.38 of the North Carolina General Statues which can be accessed on the North Carolina General Assembly webpage at www.ncga.state.nc.us/gascripts/statutes/statutes.asp.
If you’re facing a foreclosure in North Carolina and need more information about a potential deficiency judgment—or want to find out if you have any defenses to the foreclosure—consider talking to a foreclosure lawyer. If you want more information about alternatives to foreclosure, like a loan modification or short sale, a HUD-approved housing counselor is an excellent resource.