When Will I Owe a “Deficiency” after Foreclosure in Minnesota? It Depends.

Under some circumstances after foreclosure, a deficiency may still be owed on a foreclosed property. A deficiency or “deficiency judgment” is obtained by some lenders (a.k.a. “mortgagees”) after a foreclosure on real estate where the sales price of the property does not cover the balance due on the mortgage plus related any fees and costs. The amount of the deficiency is usually the difference between the total amount due on the note including expenses and costs and the amount received from the foreclosure sale (or the fair market value of the mortgaged property if the property is agricultural).

Typically under the Minnesota Anti-Deficiency Statute (Minn. Stat. 582.30), a homeowner is protected from owing a deficiency on the first mortgage on foreclosed homestead real estate. This protection only applies to certain, although common, circumstances where the property is the owner’s home and the foreclosure process was conducted as a foreclosure by advertisement. If the property is not homestead, or otherwise if the owner moves out of the property or the property is foreclosed by action, Minnesota’s statutory protection against a deficiency may not apply.

Indications that no deficiency may be owed on a foreclosed home:

  • Property is classified as a homestead property
  • The home’s value is more than what was owed on the mortgage (i.e., the home had equity)
  • Foreclosure was conducted as a “foreclosure by advertisement”
  • Mortgage in question was the first mortgage
  • Home was not abandoned before the foreclosure process was complete
  • A discharge was received in prior bankruptcy and no refinance or reaffirmation of the mortgage has occurred since

Indications that a deficiency may be owed on a foreclosed home:

  • The property was non-homestead property, i.e. rental, agricultural or commercial property
  • The amount due on the mortgage exceeds the value or sales price of the property (i.e., no equity exists in the property)
  • Mortgage in question was the second or third mortgage (i.e., any mortgage other than first priority lien)
  • Foreclosure was conducted as a “foreclosure by action”
  • Instead of foreclosure, the property was short sold, surrendered or transferred back to the lender by a deed in lieu

A discharge in Chapter 7, Chapter 13 (or Chapter 11) bankruptcy relieves a debtor from owing a deficiency on a foreclosed mortgage in most instances. In order to understand your rights and the potential liability for deficiency that you may face, you should contact an attorney to review the real estate property and foreclosure process applicable to you.

Lynn Wartchow is the founding attorney of Wartchow Law Office located in Edina, MN and represents individual consumer and business bankruptcy clients in the Minneapolis / St. Paul and greater Twin Cities metro area in Chapter 7, Chapter 13 and Chapter 11 bankruptcy proceedings filed in the Bankruptcy Court for the District of Minnesota. Wartchow Law Office also represents consumer debtors in bankruptcy proceedings filed in the Western District of Wisconsin.