Deficiency Judgment Laws in Tennessee

If you go through a foreclosure in Tennessee, the foreclosure sale could result in a deficiency. (When the foreclosure sale price doesn't cover the balance of the borrower's mortgage debt, the difference between the total debt and the sale price is called a "deficiency.") For example, if the borrower's total debt is $500,000, but the home sells to the highest bidder at a foreclosure sale for $450,000, the deficiency is $50,000.

In most states, including Tennessee, if a foreclosure sale results in a deficiency, the lender may get a "deficiency judgment" against the borrower for the deficiency amount. But in Tennessee, the borrower can ask the court to limit the deficiency judgment amount based on the home's fair market value.

Deficiency Judgment Laws in Tennessee

To find the Tennessee foreclosure statutes, including the one for deficiency judgments, 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).

Does Tennessee Law Allow Deficiency Judgments?

Most foreclosures in Tennessee are nonjudicial, which means the lender doesn't have to go through state court to foreclose. The lender could alternatively choose to foreclose through the state court system, called a "judicial foreclosure." But in states with a nonjudicial process, lenders almost always choose the nonjudicial route rather than pursuing a judicial foreclosure because an out-of-court foreclosure is relatively quick and inexpensive.

Deficiency judgments are allowed with both nonjudicial and judicial foreclosures in Tennessee.

How Do Deficiency Judgments Work in Tennessee?

The amount of the deficiency judgment is generally (unless the borrower can show fraud, collusion, misconduct, or irregularity in the sale process), the difference between the borrower's total debt, including the costs of the foreclosure and sale and the foreclosure sale price. (Tenn. Code § 35-5-117).

What Does "Irregularity in the Sale Process" Mean?

In foreclosures, the term "irregularity" or "irregularities" in the sale process sometimes comes up. If a court looks for irregularities in the foreclosure sale process, it conducts an examination to determine whether proper procedures were followed or the sale was defective. If the foreclosure sale wasn't proper, the court may order a resale of the property.

Whether a court will examine the sale for irregularities in all or most foreclosure cases, or only under certain circumstances, depends on state law and foreclosure procedures.

Fair Market Value Limitation on Deficiency Judgments

If the borrower proves by a preponderance of the evidence that the property sold for an amount that's materially less than the property's fair market value at the foreclosure sale, then the court handling the matter will limit the deficiency judgment to the borrower's total debt minus the home's fair market value at the time of the sale. (Tenn. Code § 35-5-117).

What Is the Statute of Limitations for a Deficiency Judgment in Tennessee?

In most cases, any action for a deficiency judgment must be brought not later than two years after the trustee's or foreclosure sale, excluding any time in which a petition for bankruptcy is pending. (Tenn. Code § 35-5-117(d)(1)).

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 you're off the hook for the money you still owe to junior lienholders.

Suppose a junior lienholder 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 can 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.

Can You Avoid a Deficiency Judgment in Tennessee?

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.

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Getting Foreclosure Help in Tennessee

If you have questions about Tennessee's foreclosure process or want to learn about potential defenses to a foreclosure 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).