When a property is sold at a foreclosure sale, the sale price might not be enough to pay off the mortgage debt. The difference between the total mortgage debt and the sale price is called a "deficiency." In most states, the bank can get a personal judgment, called a "deficiency judgment," against a foreclosed borrower for the deficiency amount.
Deficiency judgments are generally allowed in Maryland. However, Maryland law requires the bank to follow specific post-sale procedures. Otherwise, it can’t get a deficiency judgment.
What Is a Mortgage Deficiency in a Maryland Foreclosure?
In Maryland, a bank may choose to foreclose by filing a lawsuit in court or by using a (mostly) nonjudicial process. A court is involved to a minimal degree in a nonjudicial foreclosure. Usually, banks opt to use the nonjudicial process allowed under Maryland law.
Either way, the process ends when the property is sold at a foreclosure sale. At the sale, the bank can bid up to the total amount of the debt, including foreclosure fees and costs, or it might bid less.
Banks regularly bid less than the total amount of a borrower's mortgage debt at foreclosure sales. Once again, the difference between the total debt and a lesser winning bid at the sale is the deficiency.
Example of a Mortgage Deficiency in a Maryland Foreclosure
Suppose Meryl loses her home to a foreclosure in Maryland. At the foreclosure sale, the home sells to a new owner for $500,000. Because Meryl owed the bank $520,000, the sale resulted in a deficiency balance of $20,000.
What Is a “Deficiency Judgment” After a Foreclosure Sale?
If state law allows it, the bank can seek a personal judgment against the borrower to recover the deficiency (if there is one) after a foreclosure sale. Again, this judgment is called a “deficiency judgment.”
Does Maryland Allow Deficiency Judgments?
Yes, Maryland law allows deficiency judgments.
Are Deficiency Judgments Allowed in All Maryland Foreclosures?
Maryland law requires the bank to follow specific post-sale procedures or it can’t get a deficiency judgment. Also, if the foreclosure sale price is equal to, or more than, the mortgage debt amount, there's no deficiency. So, the bank can't get a deficiency judgment.
What Are Maryland's Deficiency Judgment Laws?
To find Maryland’s foreclosure laws, including deficiency judgment laws, go to the Code of Maryland and Maryland Rules. In this article, you'll find details on foreclosure and deficiency judgment laws in Maryland, with citations to statutes so you can learn more.
Keep in mind that statutes change, so checking them is always a good idea. How courts and agencies interpret and apply laws can change. And some rules can even vary within a state. These are just some of the reasons to consider consulting a lawyer if you're facing a foreclosure.
What Are the Legal Requirements for a Deficiency Judgment in Maryland?
In a Maryland nonjudicial foreclosure, a court must ratify the foreclosure sale. After ratification, a court-appointed auditor determines the distribution of the sale proceeds and files a report. If there is a deficiency, the bank may file a motion for a deficiency judgment within three years after a court ratifies the auditor’s report. (Maryland Rule 14-216(b), Md. Code Ann. [Real Prop.] § 7-105.17).
What Is the Statute of Limitation on Collecting a Deficiency Judgment in Maryland?
The statutory period to collect a deficiency judgment in Maryland is 12 years and the bank may extend this period for another 12 years before the period ends. (Maryland Rule 2-625).
How Banks Collect Deficiency Judgments
Generally, once a bank gets a deficiency judgment, it may collect this amount (in the example above, $20,000) from the borrower using regular collection methods, like garnishing wages or levying a bank account.
Can I Avoid a Deficiency Judgment in Maryland?
If your bank gets a deficiency judgment against you, you might be able to eliminate your liability for the judgment (and other dischargeable debts) in a Chapter 7 or Chapter 13 bankruptcy. Or you might be able to raise a defense to the deficiency, such as the bank didn't file a motion for a deficiency judgment within three years after the court ratified the auditor’s report.
Deficiency Judgments After Short Sales and Deeds in Lieu of Foreclosure
In Maryland, a bank can get a deficiency judgment following either a short sale or deed in lieu of foreclosure.
Deficiency Amount After a Short Sale or Deed in Lieu of Foreclosure
With a short sale, the deficiency is the difference between the total amount owed on the mortgage loan and the sale price. With a deed in lieu of foreclosure, the deficiency amount is the difference between the total debt and the property's fair market value.
How to Avoid a Deficiency Judgment With a Short Sale or Deed in Lieu of Foreclosure
To avoid a deficiency judgment with either of these types of transactions, the short sale or deed in lieu of foreclosure agreement must explicitly state that the bank gives up (waives) its right to the deficiency. If the contract doesn’t have language that specifically includes a waiver of the deficiency, the bank may later file a lawsuit against the borrower to get a deficiency judgment.
Will I Have Taxable Income With a Short Sale or Deed in Lieu of Foreclosure?
If a short sale or deed in lieu of foreclosure results in a deficiency, but the bank decides not to come after you for payment and forgives the debt, you're no longer under an obligation to repay the deficiency. The bank is then usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C.
Then, you might have to include the forgiven amount as income for tax purposes.
Getting Help
Consider talking to a foreclosure attorney for additional information about Maryland foreclosure laws, including potential defenses to a foreclosure lawsuit.
If you need information about different options that might be available to you to prevent a foreclosure, like a loan modification, forbearance agreement, or repayment plan, consider talking to a HUD-approved housing counselor.