If you lose your Colorado home to a foreclosure, but the foreclosure sale price is less than the amount you owed on your loan, the loan owner (called the “lender” in this article) might seek a deficiency judgment against you.
Read on to learn how a lender can get a deficiency judgment, how long you have to worry about one after you go through a foreclosure, and whether it’s likely that the lender will even come after you for a deficiency.
Colorado foreclosures are usually nonjudicial, which means a lender has to follow a series of mostly out-of-court steps and then holds a foreclosure sale where the property is sold to a new owner. At the foreclosure sale, the sale price might be less than the amount the borrower owes on the mortgage. The difference between the sale price and the total mortgage debt is called a “deficiency.”
For example, suppose Collin loses his home to a foreclosure. At the foreclosure sale, the property sold to a new owner for $250,000. Because Collin owed the lender $300,000, the deficiency is $50,000. Under Colorado law, the lender can then file a lawsuit against Collin to get a judgment—called a deficiency judgment—for the amount of the deficiency.
Once it gets a judgment, the lender may then use regular collection techniques, like garnishing Collin’s wages or levying Collin’s bank account, to collect the deficiency judgment. Or, rather than trying to collect the deficiency judgment itself, the lender might sell the judgment to a debt buyer who might then come after Collin for the deficiency amount.
Under Colorado law, the lender has six years to file a lawsuit asking a court for a deficiency judgment. (Colo. Rev. Stat. § 4-3-118).
But if the lender doesn’t bid at least the fair market value of the home at the foreclosure sale, you may raise this as a defense in a deficiency action. If the court decides that the lender’s bid was inadequate, the court may adjust the amount of the deficiency. (Colo. Rev. Stat § 38-38-106).
Just because the lender can seek a deficiency judgment after a Colorado nonjudicial foreclosure doesn’t mean it will actually sue you to get one. Lenders often decide not to go through the hassle and expense of suing for a deficiency and instead write off the borrower’s debt. (Though, if the lender forgives the deficiency amount and issues you a 1099-C, you might owe taxes on the forgiven amount. To learn more, see Will You Owe Income Taxes on Forgiven Mortgage Debt?)
However, if the lender thinks you have a steady income or assets, it might decide it’s worth the effort of filing a lawsuit to get a deficiency judgment. If you’re unable to successfully protect yourself and your assets using exemptions specific to wage garnishment, levies, or attachment, you might want to consider filing for bankruptcy. While it probably doesn’t make sense to file bankruptcy just to wipe out a deficiency judgment, filing bankruptcy might be a good idea if you have a lot of other debts you could discharge in the process.
If bankruptcy isn’t appropriate for you, you might be able to work out a payment agreement with the lender.
If you’re facing a foreclosure in Colorado or your lender has filed a suit against you to get a deficiency judgment, it's a good idea to seek advice from a qualified and experienced foreclosure attorney. Your lawyer can help you to decide on the most appropriate course of action given the specifics of your situation. If you want more information about different ways to avoid a foreclosure, a HUD-approved housing counselor is also an excellent resource.
If a lender already has a deficiency judgment against you and you want information about whether you can discharge (eliminate) your liability for the debt by filing for bankruptcy, consider talking to a bankruptcy attorney.