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.

You’ve Just Been Served with a Lawsuit, Now What?

It’s common for people who have consumer debts such as credit cards and medical bills to be sued and have judgments entered against them prior to filing bankruptcy. The first thing to realize is this is all very normal. In fact, lawsuits are so common that the threat of wage garnishment stemming from a judgment is one of the leading motivations for people to file bankruptcy sooner rather than later.

The second thing to realize if you have been sued is that lawsuits move fast and your money and earnings are at risk. In Minnesota, lawsuits are generally initiated when the plaintiff serves the defendant with a summons and complaint stating the basis for the lawsuit and amount owed. For lawsuits involving the collection of debt such as credit cards, the complaint typically will set forth the outstanding balance owed as well as tack on accrued interest and attorney fees. From the date that a summons and complaint are served, the defendant has 20 days to submit an answer or the plaintiff can quickly ask the court for a default judgment. Once a judgment is entered, the creditor is now a  judgment creditor” and has additional remedies available to collect on the amount owed, including garnishment of wages and levying any bank account that is linked to the “judgment debtor”.

Bankruptcy stops a lawsuit the moment a bankruptcy petition is filed with the court. If
the lawsuit is still pending at the time the bankruptcy is filed, a judgment cannot be entered. However if the lawsuit has already been reduced to a judgment, the judgment can still be discharged by bankruptcy. In some circumstances money that has been garnished from wages or levied from a bank account prior to the bankruptcy can be returned to you. There is a process to remove judgments post-bankruptcy discharge, which is advisable to help restore credit quicker after bankruptcy.

If you have been served with a lawsuit, you may wish to act fast to consult your bankruptcy options within the first couple weeks. While it’s generally best to head off a lawsuit before it gets to the point of judgment, you still have options even after a judgment is entered. A bankruptcy attorney can clearly explain what you can expect as far as the lawsuit, judgment and the return of any garnished or levied funds are concerned. Just remember that the legal process moves quickly and prevention is the best defense.

Lynn Wartchow is the founding attorney of Wartchow Law Office and has represented clients in Chapter 7 and Chapter 13 consumer bankruptcy proceedings since early 2005.