If you lose your home through foreclosure in Tennessee and the sale proceeds don't cover the remaining balance on your mortgage, the foreclosing party (the "lender") can come after you for the deficiency."
Read on to learn what a deficiency judgment is and how much your mortgage lender can collect against you in Tennessee. (For more articles on foreclosure in Tennessee, visit our Tennessee Foreclosure Law Center.)
When a lender forecloses on a mortgage, the total debt the borrowers owe to that lender frequently exceeds the foreclosure sale price. The difference between the sale price and the total debt is called a deficiency.
Example. Say the total debt owed is $200,000, but the home sells for $150,000 at the foreclosure sale. The deficiency is $50,000.
In some states, the lender can seek a personal judgment (a deficiency 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 the borrowers’ wages or levying the borrowers’ bank account. (Learn about methods that creditors can use to collect judgments.)
The majority of foreclosures in Tennessee are nonjudicial, which means the lender does not have to go through state court to foreclose. But sometimes foreclosures in Tennessee are judicial and go 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?)
Deficiency judgments are allowed with both nonjudical and judicial foreclosures in Tennessee. The amount of the deficiency judgment will generally be the difference between the total debt and the foreclosure sale price. However, if the borrower proves that the property sold for an amount materially less than fair market value at the foreclosure sale, then the deficiency judgment will be limited to the total debt minus the fair market value of the property at the time of the sale. (Tenn. Code Ann. § 35-5-118).
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 the borrower personally on the promissory note. This means that if the equity in your home doesn’t cover second and third mortgages, you might 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?)
To find the Tennessee foreclosure statutes, go to www.lexisnexis.com/hottopics/tncode. The relevant statutes can be found in Title 35 (Fiduciaries and Trust Estates), Chapter 5 (Judicial or Trust Sales).
If you’re facing a foreclosure, consider talking to a local foreclosure attorney. A foreclosure attorney can explain different options that might be available to prevent a foreclosure, like a loan modification, forbearance agreement, or repayment plan, and can tell you if you have any defenses to the foreclosure. If you can’t afford to hire a lawyer, consider speaking with a HUD-approved housing counselor.