Can the bank sue for a deficiency judgment after foreclosure?

The bank can sue for a deficiency judgment after foreclosure if the borrower owes more than the property is worth.

In many areas of the country the huge number of foreclosures has resulted in a substantial loss in real estate values. It's not uncommon for homeowners to be "upside down" because the value of their property has dropped below what they owe on the property. Because of this, more and more borrowers are considering just "walking away" from their property and allowing the bank to foreclose.

While this may seem the logical thing to do, it's not entirely without risk.

The first negative result will be lasting damage to the borrower's credit. The response I've often heard to this warning is, "My credit is already in the toilet; it can't get much worse!"

The second negative result may be an unexpected income tax bill. If the bank chooses not to pursue the borrower to collect the deficiency, it will probably send the borrower a 1099 form for the amount of the loan which it writes off. Although Congress has recently passed legislation to reduce the impact of this risk, in theory the amount of any forgiven debt is considered taxable income.

The third negative result may be that the bank will sue the borrower for a deficiency judgment. While this hasn't happened often so far, it's still a risk.

Here's how it all fits together:

Nevada has a law called the "One Action Rule." Under this law the lender has to foreclose on the property before it can sue the borrower. If the lender sues first, it loses its collateral.

After the Trustee's Sale (the foreclosure sale), under certain conditions governed by NRS 40.455, the lender can sue if there is a deficiency, that is, if the value of the property on the date of the trustee's sale is less than the amount owing on the loan. The lender has strict rules it must follow in pursuing a deficiency.

1. It has to file the lawsuit within 6 months after the trustee's sale or it loses its right to sue.
2. The value of the property is not governed by how much it sells for at the trustee's sale. The lender must prove the value through an appraiser, and the borrower has the right to present his or her own appraiser's opinion of value.

AB471 -- An Important New Development For Purchase Money Mortgages

The 2009 session of the Nevada Legislature passed a new law - AB471 - which eliminates the possibility of a deficiency judgment on a deed of trust which is used to purchase the borrower's personal residence. The law probably only applies to purchases after October 1, 2009, although the law is ambiguous as to whether it might apply to any trustee's sale after October 1, 2009. The new law has narrow application. In order for the law to apply the following criteria must be present:

• The lender must be a financial institution.
• The real property is a single-family dwelling and the debtoror grantor was the owner of the real property at the time of theforeclosure sale or trustee’s sale.
• The debtor or grantor used the amount for which the realproperty was secured by the mortgage or deed of trust to purchasethe real property.
• The debtor or grantor continuously occupied the realproperty as his principal residence after securing the mortgage or deed of trust; and
• The debtor or grantor did not refinance the mortgage ordeed of trust after securing it.

Click here for an enrolled copy of AB 471.

---

Return from deficiency judgment page to foreclosure page.