Collecting Loan Debt After Foreclosure (Deficiency Judgment)January 15, 2021
Lenders Can Pursue Borrowers for Loan Debt Remaining After Foreclosure by Obtaining a Deficiency Judgment
Lenders are frequently left with a balance remaining on the loan (commonly referred to as the “deficiency”) after completing a foreclosure of the real estate collateral for the loan. This is the case if the loan debt exceeds the value of the property securing the loan.
In Connecticut, lenders are permitted to pursue borrowers (and other loan obligors, e.g., loan guarantors) personally for the deficiency (loan balance) due on the loan after foreclosure. To do so, a deficiency judgment must be obtained by the lender. Thereafter, the lender can collect the deficiency judgment from assets of the borrower (e.g., real estate, personal property (bank accounts, jewelry, other goods) and wage executions).
Procedure to Obtain a Deficiency Judgment
The procedure to obtain a deficiency judgment is set forth by Connecticut General Statutes Sections 49-1, 49-14, 49-28 and Connecticut Practice Book Section 23-19.
The Lender begins by filing a motion for deficiency judgment following the conclusion of the foreclosure action, which occurs (a) in a strict foreclosure, when title to the property vests in the lender after passing of the law days without redemption, or (b) after a foreclosure by sale, when the court approves the sale. If the foreclosure judgment was by strict foreclosure, the lender (per C.G.S. Sections 49-1 and 49-14) must file the motion within thirty days of the last law day, otherwise the lender is barred from obtaining a deficiency judgment against the borrower (although the lender can still pursue the deficiency against loan guarantors). JP Morgan Chase Bank, N.A. v. Winthrop Props., LLC, 312 Conn. 662 (2014). If the foreclosure judgment was by sale, the lender (per C.G.S. Sections 49-1 and 49-28) is not similarly required to file the motion by a specific date after the foreclosure, but should not delay in doing so, or risk being subject to a defense of laches (delay).
The motion for deficiency judgment (per P.B. Section 23-19) should include (a) the amount of the deficiency, equal to the remaining loan balance after deducting the value of the property foreclosed, and (b) if the judgment was by strict foreclosure, (i) the value of the foreclosed property on the date that title to the property vested in the lender, and (ii) the name of the lender’s expert to evidence said value.
After filing the motion, the court schedules a hearing at which the lender has the burden to evidence the amount of the deficiency set forth in the motion (i.e., loan balance as of the date of the hearing, less the value of the property foreclosed). If the judgment was by strict foreclosure, the value of the property is measured as of the date that the lender took title to the property, less any priority debt owed (e.g., prior liens, real estate taxes, water and sewer amounts). If the judgment was by sale, the value of the property is established by the (court-approved) price at which the property was sold at the foreclosure auction. As a component of the deficiency judgment, lenders can and should request that post judgment interest accrue to the deficiency judgment amount.
A deficiency judgment is how lenders can pursue borrowers (and other obligors) personally for the loan balance remaining after foreclosure. For this reason, lenders should pursue deficiency judgments to maximize recovery after mortgage default.
Disclaimer: This article is for educational purposes only and to give you a general understanding of the law, not to provide specific legal advice. No attorney-client relationship exists by reading this article. This article should not be used as a substitute for legal advice from a licensed professional attorney in your state.