Deficiency Judgments After Foreclosure in Wisconsin

If you go through a foreclosure in Wisconsin, the foreclosure auction 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.")

In most states, including Wisconsin, if a foreclosure sale results in a deficiency, the lender may get a "deficiency judgment" against the borrower for the deficiency amount. But Wisconsin law limits the amount of the deficiency if the property's fair market value is more than the foreclosure sale price. And, state law gives the lender an incentive to waive the deficiency: If the lender chooses to forgo a deficiency judgment, the redemption period before the sale is shorter.

How Foreclosure Sales Work

If you default on your mortgage loan, the lender can go through a specific legal process called "foreclosure" to sell your home to repay the outstanding debt. After the lender fulfills all of 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, which is a "credit bid." With a credit bid, the lender gets a credit in the amount of the borrower's debt. The lender can bid up to the total amount of the debt, including foreclosure fees and costs, or it might bid less. 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. If the lender buys the property at the sale and gets title to the home, the property is considered "real estate owned" (REO).

Lenders regularly bid less than the total amount of a borrower's mortgage debt at foreclosure sales.

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

When the lender gains ownership of a property through the foreclosure process, and if state law allows it, the lender can seek a personal judgment against the borrower to recover the deficiency, if one exists. This kind of money judgment is called a "deficiency judgment." 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.

But if the sale price is equal to, or more than, the mortgage debt amount, you're off the hook because no deficiency exists—even if the lender can't resell the property for the same amount after the foreclosure sale. In fact, 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 if 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 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. That is, the property's fair market value is substituted for the foreclosure sale price when calculating the deficiency amount.

Other states limit 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. (To find out the time limit in your state, talk to a foreclosure lawyer.) And various states require specific procedural requirements to get a deficiency judgment, while specific states don't allow deficiency judgments in some circumstances, like after nonjudicial foreclosures.

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 can probably eliminate your liability for a deficiency judgment, like many other dischargeable debts, in a Chapter 7 or Chapter 13 bankruptcy.

Will My Lender Sue Me for a Deficiency Judgment?

Even if your lender has the right under state law to go after you for a deficiency judgment, it might decide not to do so—especially if you don't have many assets to satisfy the judgment. The lender might decide it isn't worth the expense and effort of getting a deficiency judgment.

Still, you should know whether your lender can potentially pursue you for a deficiency after a foreclosure. Also, even if the lender decides not to sue you for a deficiency judgment, it could later sell the debt to a debt buyer who might file a lawsuit against you for the deficiency later on.

Deficiency Judgments After Wisconsin Foreclosures

Foreclosures in Wisconsin are judicial, which means the lender must foreclose through the state court system. A judicial foreclosure begins when the lender files a lawsuit asking a court for an order allowing a foreclosure sale. The lender gives notice of the suit by serving the borrower and any other defendants in the action a summons and complaint. In Wisconsin, the lender may obtain a deficiency judgment as part of the foreclosure if it demands one in its complaint. (Wis. Stat. § 846.04).

Limitations on Deficiency Judgments in Wisconsin

Under Wisconsin law, again, a lender can get a deficiency judgment in the judicial foreclosure. But the court won't presume that the home sold for its fair value at the foreclosure sale, and the court may not confirm the sale or render a judgment for deficiency until it's satisfied that the property's fair value has been credited on the mortgage debt. So, if the foreclosure sale price is less than the property's fair market value, the deficiency amount is limited to the difference between the borrower's mortgage debt and the home's fair market value. (Wis. Stat. § 846.16).

Shortened Redemption Periods If the Lender Waives the Deficiency Judgment

In Wisconsin, the foreclosure sale happens after a redemption period. During the redemption period, the borrower has the right to stop the foreclosure by paying the full amount of the foreclosure judgment, plus interest and costs (Wis. Stat. § 846.13).

But if the lender waives its right to a deficiency judgment, the redemption period is shortened. Because of the availability of a shortened period, lenders often choose not to seek deficiency judgments against borrowers in Wisconsin. The following redemption period information applies to owner-occupied, one- to four-family homes on 20 acres or less.

Redemption period for mortgages executed before April 27, 2016. The foreclosure sale can't occur until 12 months after the court enters a judgment to foreclose. (Wis. Stat. § 846.10). If the lender waives its right to a deficiency judgment, the redemption period is shortened from 12 months to six months. (The lender can waive the deficiency judgment and shorten the redemption period only if the borrower agrees in writing when signing the mortgage. Most Wisconsin mortgages contain a paragraph in which the borrower agrees to a shortened redemption period if the lender waives the deficiency judgment.) (Wis. Stat. § 846.101).

Redemption period for mortgages executed on and after April 27, 2016. The foreclosure sale can't take place until six months after the court enters a judgment to foreclose (Wis. Stat. § 846.10). The borrower may ask the court to extend the redemption period to eight months, but only if the borrower is attempting in good faith to sell the mortgaged premises and has entered into a listing agreement with a licensed real estate broker.

If the lender waives its right to a deficiency judgment, the redemption period is shortened to three months. (Again, the lender can waive the deficiency judgment and shorten the redemption period only if the borrower agrees in writing when signing the mortgage. Most Wisconsin mortgages contain a paragraph in which the borrower agrees to a shortened redemption period if the lender waives the deficiency judgment.) The borrower may ask the court to extend the redemption period to five months, but only if the borrower is attempting in good faith to sell the mortgaged premises and has entered into a listing agreement with a licensed real estate broker. (Wis. Stat. § 846.101).

Abandoned homes have a five-week redemption period. Regardless of whether a deficiency is sought, the redemption period is five weeks if you abandon (permanently move out of) the home. (Wis. Stat. § 846.102.)

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 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.

Getting Foreclosure Help in Wisconsin

If you have questions about Wisconsin'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.

It's also a good idea to talk to a HUD-approved housing counselor if you want to learn about different loss mitigation options. 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, which is open 24 hours a day, seven days a week, at 888-995-HOPE (4673).