If you go through a North Carolina foreclosure, but the foreclosure sale price isn't enough to fully repay the bank for your home loan, the bank can generally come after you for a deficiency judgment.
However, North Carolina has several anti-deficiency laws. These laws limit the circumstances under which the bank can get a deficiency judgment and limit the amount of a deficiency judgment in some situations.
How a North Carolina Foreclosure Might Result in a Deficiency
In North Carolina, a bank may choose to foreclose by filing a lawsuit in court or by using a nonjudicial process. Usually, banks opt to use the nonjudicial process.
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. (At a foreclosure sale, the foreclosing bank gets a credit up to the amount of the borrower's total debt so it bids using a "credit bid.")
What’s a Deficiency After Foreclosure?
The difference between the mortgage debt and a lower sale price is called a "deficiency." The deficiency amount is determined by the winning bid at the foreclosure sale.
How to Calculate the Amount of a Deficiency in North Carolina
Suppose Nelson owes the bank $450,000 on his home loan. At the foreclosure sale, the bank makes a credit bid on the home for $400,000. The bank is the high bidder at the sale and becomes the new owner of the property. The deficiency is $50,000.
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. This kind of money judgment is called a “deficiency judgment.”
How a Bank Collects a Deficiency Judgment
Once a bank gets a deficiency judgment, it may generally collect the deficiency from the borrower through typical collection techniques.
Are Deficiency Judgments After a Home Foreclosure Allowed in All the States, Including North Carolina?
Most states allow a foreclosing bank to get a deficiency judgment against a borrower for the deficiency amount. However, some states have laws prohibiting deficiency judgments in certain circumstances.
In North Carolina, deficiency judgments are generally allowed, subject to some restrictions.
What Are the Legal Requirements for a Deficiency Judgment After a Nonjudicial Foreclosure in North Carolina?
In North Carolina, if allowed under the circumstances, a bank may obtain a deficiency judgment by filing a lawsuit against you after a nonjudicial foreclosure.
When Deficiency Judgments Aren’t Allowed in North Carolina
In North Carolina, a bank can’t get a deficiency judgment if the mortgage was a seller financed, purchase money mortgage or deed of trust. (N.C. Gen. Stat § 45-21.38).
The foreclosing bank might also be prohibited from seeking a deficiency judgment if the mortgage is nontraditional (such as a loan that allows the borrower to defer payment of principal or interest and allows negative amortization of the loan balance) or is a rate spread loan and the borrower’s principal residence secures the mortgage loan. (N.C. Gen. Stat. § 45-21.38A).
To get details about the kind of loans that are protected from deficiency judgments in North Carolina, read the relevant statutes or talk to a local foreclosure attorney.
Can I Reduce a Deficiency Judgment in North Carolina?
If the foreclosing bank buys the property at the foreclosure sale, but the sale price was less than the fair market value of the home, the borrower can challenge the deficiency judgment. If the borrower shows that the home's fair market value was more than the sale price, then the borrower is only liable for the difference between the fair market value and the total debt. (N.C. Gen. Stat. § 45-21.36).
Example. Again, say the borrower owed $450,000 to the bank. The bank buys the home at the foreclosure sale for $400,000. But the borrower proves to a court that the home's fair market value was $425,000. Then, the deficiency will be reduced to $25,000 ($450,000 - $425,000) from $50,000.
Can I Avoid a Deficiency Judgment in North Carolina?
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 work out a settlement with the bank to accept less than the full deficiency amount and forgive the rest. Generally, however, the IRS considers forgiven debt as taxable income, subject to some exceptions.
Deficiency Judgment After a Short Sale or Deed in Lieu of Foreclosure in North Carolina
A "short sale" is when you sell your home for less than the total debt you owe, and the sale proceeds pay off a portion of the balance. A deed in lieu of foreclosure (deed in lieu) is when a bank agrees to accept a deed to the property instead of foreclosing to get the property’s title. With a deed in lieu, the deficiency amount is the difference between the total debt and the property's fair market value.
The bank may get a deficiency judgment in North Carolina after a short sale or deed in lieu. The agreement must state that the bank waives its right to the deficiency to avoid a deficiency judgment with either of these transactions. The bank may sue for a deficiency judgment if the contract doesn't contain this waiver. However, you might have tax consequences if the bank forgives the deficiency.
Getting Help
If you have questions about North Carolina's foreclosure process or want to learn about potential defenses to a foreclosure and possibly fight the foreclosure in court, consider talking to a foreclosure attorney.
It's also a good idea to talk to a HUD-approved housing counselor about different loss mitigation options, such as a loan modification, short sale, or deed in lieu of foreclosure.