As a Florida foreclosure defense law firm, we get lots of questions about deficiency judgments.  In some cases, that is not an issue because we negotiate a waiver of deficiency with the lender, such as with a short sale or consent judgment.    However, those homeowners considering going to trial to fight for their homes want to know about the possibility of having a judgment entered against them for the difference between the sale price of the property and the amount due on the loan.[1] 

Right to Deficiency Judgment

Why would a lender be entitled to a deficiency judgment?  After all, in most non-judicial foreclosure states, the lender cannot sue for the deficiency.  In California, where our firm has an office, lenders can foreclose on properties without having to bring a lawsuit.  (The onus is on the homeowner to file suit in order to prevent the foreclosure.)  The trade-off is that the lenders cannot seek to recover any difference remaining on the loan after re-sale of the property–i.e. the “deficiency.”

Also, didn’t these lenders receive large payments from the government and insurance companies to cover their loses when the housing bubble bursted?  If so, isn’t giving them the house on top of that kind of having your cake and eating it too?  If so, then I suppose giving them a deficiency judgment in addition to the bailout money and the property would be a bit like having your cake, eating it too, and then being given a cupcake to go with it.

While we can debate the fairness of deficiency judgments — and we should — Florida Statute §702.06 does provide mortgagees the right to seek a deficiency judgment upon foreclosure or short sale of the subject property.  Until last year, Florida courts have done little to curb that right.

Protections Against Deficiency Judgments

In a few districts, if the plaintiff purchased the note at a substantial discount, the court may not allow a deficiency judgment.  See Jonas v. Bar-Jam Corp., 170 So. 2d 479, 480 (Fla. 3d DCA 1965).  In today’s world, where most loans are sold multiple times, this protection can be very valuable.  That is only available where the local court adheres to this policy.[2]

Another potential protection exists in that the statute puts the award of deficiency judgments “within the sound discretion of the court.”  That means a judge has the power to deny or limit requests for deficiency judgments.  Some judges are actually sympathetic to the plight of homeowners going through foreclosure and might use their discretion to provide what protection they can.

 Also, no deficiency judgment is available where the market value of the property is greater than the amount due on the loan.  This did not used to come up very often since almost all real property in the country was “upside-down.”  However, the market has been steadily on the rise now for the last several years and many properties are back to even, or at least close to it.    And, if the house is only a little bit “upside-down,” then it probably is not worth the time and money it would cost the bank to obtain a deficiency judgment.  Thinking from this prospective leads us to the business considerations that weigh heavily in the way lenders actually handle these matters.

July 1, 2014 Deadline

In actuality, even though lenders in Florida do have the right to seek a deficiency judgment, they very rarely do.  The most intuitive explanation for this restraint is that lenders believe (i) it may be difficult to obtain a worthwhile judgment, and (ii) even if they get a judgment, they will not be able to collect on it.  (I doubt lenders have a problem with the ethics of having your cake and eating it too.)

Lenders will typically attempt to get as much financial information from the borrower as possible during the foreclosure or loss mitigation process.  One obvious reason is to determine collectability of a deficiency judgment.  In theory, if the deficient amount is substantial and the borrower has assets to pay the judgment, then the bank is incentivized to go after the deficiency judgment.  As a practical matter, however, banks are not law firms and they are not particularly interested in spending their time and resources litigating.  So, typically lenders will “write off” the deficiency and use the loss as a tax deduction.

I have seen lenders sell their cause of action—that is, their right to seek a deficiency judgment—to a third party.  There are companies and individuals out there who buy up judgments and causes of action for pennies on the dollar and then attempt to collect.  That has happened, and we have seen these collection agencies file some deficiency actions in order to beat the new deadline of July 1, 2014.

The Florida legislature decided to give Florida homeowners some sense of certainty by requiring deficiency actions be filed by the deadline for all foreclosure cases completed (i.e. issuance of the certificate of title) prior to July 1, 2013.  Further all new foreclosure cases now have a 1-year limitations period for filing deficiency actions.

That means once the foreclosure is over, the plaintiff has one year to file for deficiency.  After that, you are in the clear.

As for the old cases, some deficiency actions have indeed been filed, but not as many as some people were expecting.  The specter of bankruptcy is likely a factor.

Home loans are secured debts that are not dischargeable through bankruptcy.  However, once the deficiency is considered unsecured debt.  Therefore, even where the lender or some third party is successful in obtaining a deficiency judgment against the borrower, the borrower has the option of declaring bankruptcy and erasing the debt.

In the wake of the economic crisis, many people have been forced into bankruptcy even without the consideration of a deficiency judgment.  Since any deficiency judgment worth pursuing is likely to be quite large, it seems likely many homeowners would seek bankruptcy protection to avoid the debt.  This consideration is no doubt a powerful deterrent to lenders and third parties.  After all, they would not want to go through all the time and expense of obtaining a deficiency judgment just to see it melt away in bankruptcy proceedings.

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Jeffrey Harrington, Esq.

[1] The analysis here, is limited to Florida, a state that requires judicial foreclosure, because in non-judicial foreclosure states—such as California—deficiency judgments are virtually a non-issue.

[2] Be awaree the court’s decision in Ahmad v. Cobb Corner, Inc., 762 So. 2d 944, 947 (Fla. 4th DCA 2000) flatly rejects this restriction to deficiency ju