If you go through a foreclosure, but the buyer at the foreclosure sale pays less than you owe on your mortgage loan, the bank might later sue you for the deficiency. Once the bank gets a judgment against you in this amount, it could potentially go after your other assets, even after foreclosing on your home.
Summary of How a Colorado Foreclosure Works
Colorado foreclosures are considered nonjudicial, which means the bank generally has to follow a series of out-of-court steps to foreclose. However, Colorado nonjudicial foreclosures have a unique process that requires a public trustee rather than a private one and minimal court involvement.
You’ll receive several notices in the Colorado foreclosure process, including:
- a preforeclosure notice
- a notice about the sale and your right to cure, and
- a notice about a Rule 120 hearing.
Colorado foreclosures can also be judicial, but most banks choose the faster and cheaper nonjudicial option.
How Foreclosure Sales Work
At the foreclosure sale, the bank will bid on the home. Other parties might make a bid as well. Unlike third parties, however, when a foreclosing bank bids on a home, it doesn’t bid cash. Instead, the bank uses a “credit bid.” Basically, this means that the bank gets a credit up to the total amount that the borrower owes. With its credit bid, the bank may bid the full amount of the debt, or it may offer a lesser amount.
If the bank is the high bidder with its credit bid, it becomes the new owner of the home. If, on the other hand, a third party makes a bid that’s higher than the bank’s credit bid, the high bidder purchases the home. The proceeds from the sale then go towards paying back the outstanding debt.
Deficiency Judgments: Owing More Money After the Sale
The entity or person that buys the property at the sale (either the foreclosing bank or a third party) might pay less than you owed. The difference between the purchase price and your debt, which includes the outstanding balance of the loan plus foreclosure fees and costs, is called a “deficiency.”
For example, suppose you owe $700,000 on your loan, including the fees and costs associated with the foreclosure. At the foreclosure sale, your home sells to a new owner for $650,000. Because you owed $700,000 at the time of the foreclosure, the deficiency is $50,000.
In some states, like Colorado, the bank can get a personal judgment, called a “deficiency judgment,” against the borrower for the deficiency amount.
How the Bank Gets a Deficiency Judgment in Colorado
Under Colorado law, the bank has six years after a nonjudicial foreclosure to file a lawsuit asking a court for a deficiency judgment against you. (Colo. Rev. Stat. § 4-3-118 (2024).)
But if the bank bought the property at the foreclosure sale and didn't bid at least the fair market value of the home (less any unpaid property taxes, senior liens, and other specified costs associated with selling the property), you may raise this as a defense in the deficiency action. If the court decides that the bank’s bid was inadequate, the court may reduce the amount of the deficiency. (Colo. Rev. Stat. §38-38-106 (2024).)
Will the Bank Sue You and Go After Your Assets Following a Colorado Foreclosure?
Once it gets a deficiency judgment, the bank may then use regular collection techniques (like placing a lien on other real estate you own, garnishing your wages, or levying your bank account) to collect on the deficiency judgment.
But even though the bank can sue you for a deficiency judgment, it might not bother, especially if you don’t have many assets. Banks often skip the hassle and costs associated with suing for a deficiency and instead write off the borrower’s debt. However, be aware that if the bank cancels the deficiency amount and issues you a 1099-C, you might have to pay taxes on the canceled amount.
Who's Likely to Face a Deficiency Judgment
People with a steady income or ample assets are more likely to face a deficiency judgment suit. If you’re not able to protect your assets using exemptions specific to garnishment, levies, or attachment, you might consider filing for bankruptcy. While filing for bankruptcy probably doesn’t make sense just to avoid a deficiency judgment, if you have a lot of other dischargeable debts, it might be worthwhile to consider this route. To get information about bankruptcy that’s relevant to your specific circumstances, talk to a bankruptcy attorney.
If bankruptcy isn’t right for your situation, you might be able to work out a payment agreement with the bank, or it might agree to accept a reduced deficiency amount. Again, you might have tax consequences if the bank forgives all or part of the deficiency.
Getting Help in a Colorado Foreclosure
If you’re facing a Colorado foreclosure and want to learn about possible defenses or how to defend against a deficiency lawsuit, consider talking to a foreclosure lawyer.
To learn about ways to avoid a foreclosure in the first place, like by completing a mortgage modification, short sale, or deed in lieu of foreclosure, consider talking to a HUD-approved housing counselor.