In Wisconsin, if you go through a foreclosure and the sale price is not enough to cover the balance of your mortgage, your lender can come after you for the "deficiency," but it may choose not to. Read on to learn what a deficiency judgment is, when your mortgage lender can collect one against you in Wisconsin and when it might not, and what happens to the deficiency in a short sale or a deed in lieu of foreclosure in Wisconsin.
(For more articles on foreclosure in Wisconsin, visit our Wisconsin Foreclosure Law Center.)
When a lender forecloses on a mortgage, 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. Say the total debt owed is $200,000, but the home only sells for $150,000 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 the borrowers’ wages or levying the borrowers’ bank account. (Learn about methods that creditors can use to collect judgments.)
(To learn more about deficiency judgments in the foreclosure context, see Deficiency Judgments: Will You Still Owe Money After the Foreclosure?)
Foreclosures in Wisconsin are judicial, which means the lender has to go through state court to foreclose. (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?) The lender initiates the foreclosure by filing a complaint with the court. The complaint is served to the homeowner, along with a summons.
Learn more about the Wisconsin foreclosure process.
Deficiency judgments are allowed in Wisconsin. A lender may obtain a deficiency judgment if it demands one in its complaint (Wis. Stat. § 846.04).
Limitation on amount of deficiency judgment. If the foreclosure sale price is less than the fair market value of the property, the amount of the deficiency judgment is limited to the difference between:
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 shortened period, lenders often opt not to seek a deficiency judgment. The following redemption period information applies to owner-occupied homes on 20 acres or less.
Mortgages executed before April 27, 2016. The foreclosure sale cannot take place 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 (Wis. Stat. § 846.101).
Mortgages executed on and after April 27, 2016. The foreclosure sale cannot 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 he or she 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 (Wis. Stat. § 846.101). The borrower may ask the court to extend the redemption period to five months, but only if he or she is attempting in good faith to sell the mortgaged premises and has entered into a listing agreement with a licensed real estate broker.
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 mortgage holder has been sold-out in this manner, that junior mortgage holder 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?
A short sale is when you sell your home for less than the total debt balance remaining on your mortgage and the proceeds of the sale pay off a portion of the mortgage balance. (Learn more about short sales to avoid foreclosure.)
In Wisconsin, a lender can get a deficiency judgment following a short sale. To avoid a deficiency judgment, the short sale agreement must expressly state that the lender waives its right to the deficiency. (You might have to pay taxes on the forgiven amount.) If the short sale agreement does not contain this waiver, the lender may file a lawsuit to obtain a deficiency judgment.
A deed in lieu of foreclosure occurs when a lender agrees to accept a deed to the property instead of foreclosing in order to obtain title. With a deed in lieu of foreclosure, the deficiency amount is the difference between the fair market value of the property and the total debt. (Learn more about deeds in lieu of foreclosure.)
In Wisconsin, a lender can get a deficiency judgment following a deed in lieu of foreclosure. To avoid a deficiency judgment with a deed in lieu of foreclosure, the agreement must expressly state that the transaction is in full satisfaction of the debt. (You might have to pay taxes on the forgiven amount.) If the deed in lieu of foreclosure agreement does not contain this provision, the lender may file a lawsuit to obtain a deficiency judgment against you.
To find the Wisconsin statutes, go to the State Legislature’s webpage at http://legis.wisconsin.gov. Select “Law and Legislation” and then "Statutes Table of Contents." The statutes that govern foreclosures can be found in Chapter 846 (Real estate foreclosure).