Seemingly the most common reason people file bankruptcy today is due to real estate. Debtors who are behind on their mortgage are understandably worried that they could not only face a foreclosure, but their lender could also pursue a deficiency judgment. This worry will often lead debtors to filing bankruptcy so they cannot be sued for the balance.
While it is good to be thinking proactively, it is very important before a debtor decides to file bankruptcy because of a mortgage deficiency that the debtor familiarizes oneself with the lenders rights in their particular state. This is because the rules of both foreclosure and the ability to pursue a deficiency judgment and will vary based on whether the judgment debtor is in a judicial foreclosure or non-judicial foreclosure state. Judicial foreclosure means the lender must initiate a lawsuit to obtain a foreclosure. In some states, the lender can only take back the property and cannot pursue a deficiency. Therefore, it would probably be a waste to file bankruptcy in those states solely to protect against a creditor who cannot even sue the debtor for the balance.
In Georgia, a first mortgage holder can sue for a deficiency, but often does not. The reason is because for the lender to pursue a deficiency, they must go through a two-step process. The first part is called the confirmation of sale.
OCGA 44-14-161(a) states when any real estate is sold on foreclosure . . . and at the sale the real estate does not bring the amount secured by the deed, mortgage or contract, no action may be taken to obtain a deficiency judgment unless the person instituting the foreclosure proceeding shall, within 30 days after the sale, report the sale to the judge of the superior court of the county in which the land is located for confirmation and approval and shall obtain an order of confirmation and approval thereon.
As the borrower in most cases did not pay on the mortgage because he/she did not have the money, lenders often decide not to bother with the onerous process of this confirmation of sale because the debtor probably does not have the money to pay off the judgment anyway. The second part of pursuing the debtor involves the lender suing for a deficiency judgment amount after receiving an order at confirmation.
Note that the debtor can challenge the valuation at the confirmation sale, and the lender will have to prove the fair market value of the property regardless of what the property sold for at the foreclosure sale. Furthermore, even after getting an order of confirmation the lender still must sue on the note, so the debtor can still file bankruptcy then before getting garnished and can even still work out a settlement with the lender at that point.
Further note that the confirmation of sale is only applicable to the lender if it forecloses. As such, it is important whether there is also a junior mortgage that is not foreclosing. As that junior mortgage gets swallowed up in the foreclosure sale and that junior mortgage does not get the property, it is not bound by the confirmation of sale requirement. The junior mortgage owns a note that the debtor defaulted on and can simply sue the debtor on that default without going through the confirmation process.
For those considering bankruptcy, this whole timeline often presents a problem. The typical scenario plays out like this: The debtor only wants to file bankruptcy if it knows the bank is going to pursue a deficiency, but since the bank can only pursue the balance from the debtor by doing the confirmation after the foreclosure, the debtor cannot both wait until the last possible moment to file bankruptcy and file before the foreclosure sale to stop the house from going into foreclosure.
Although it is impossible to predict what the bank(s) will do, if the debtor is going to make its decision on what it likely to happen, the debtor should consider these factors.
If there is a junior mortgage, the debtor can be sued on this note default until the statute of limitations for the note itself expires, which is quite some time. So even if the lender is not going to sue the debtor now, the debtor might have the payoff of this note lingering in the background for several years.
If there is not a junior mortgage, the debtor should understand that if he/she has considerable assets and maybe is not paying this mortgage as part of a strategic default, then the lender is much more likely to pursue a deficiency than if the debtor simply has no assets to speak of. If the debtor has no assets, the first mortgage holder is probably going to just take the house and not sue the debtor on the note.
For an additional perspective on mortgage deficiency issues in Georgia, click here.
How does the debtor “challenge the valuation at the confirmation sale?”
The confirmation sale is a hearing in front of a judge. The debtor will have notice of the hearing date. Regardless of the sale price at the foreclosure sale, the debtor can bring its own evidence to dispute the value the lender is alleging. An appraiser willing to testify to the debtor’s stated valuation is a good start. More evidence is county records or perhaps a realtor’s broker priced opinion.