How Does a Deficiency Judgment Work in Pennsylvania?

Foreclosure is not something any homeowner wants to go through, but it might be unavoidable. Many people find moving on from the foreclosure process difficult if they are hit with a deficiency judgment.

A deficiency judgment is a court ruling holding someone liable for debts owed to a lender after that lender forecloses on that person’s property. The deficiency is whatever remains of the initial loan that has not been repaid to the lender. Lenders have a limited time to pursue such a judgment and must do so through the courts. The value of the judgment may be based on multiple factors, including the property’s fair market value. Deficiency judgments are typically unsecured debts that can be obtained only through a court ruling, and the lender must convince a judge of the deficiency. An attorney can help you avoid or possibly reduce a deficiency judgment.

Contact our Pennsylvania bankruptcy attorneys at Young, Marr, Mallis & Associates for a free case review by calling (215) 701-6519.

What is a Deficiency Judgment in Pennsylvania?

A deficiency judgment may be imposed against homeowners after foreclosure if their home is sold at a sheriff’s sale for less than they owe to the bank. If the bank or some other lender secures a deficiency judgment, they may legally pursue the homeowners for the remaining balance.

Foreclosure Sale Happens

When a home or other real property is foreclosed upon, the creditor or lender, usually a bank, sells the property to recoup their losses. This is often called a sheriff’s sale or sheriff’s auction. It is very common for lenders to sell houses for less than the initial loan amount, leaving an unpaid balance.

Deficiency Occurs

The unpaid balance is known as a deficiency balance. For example, suppose you took out a $300,000 loan to buy a home. Next, suppose the home went into foreclosure after you missed too many mortgage payments. Now, suppose you paid back the bank $75,000, and the bank sold the home for $200,000. Only $275,000 of the loan has been repaid, with a deficiency balance of $25,000.

Lender Files Legal Action

In Pennsylvania, a deficiency balance may pose a problem. Lenders or creditors can take the case to court and get a deficiency judgment against you, making you liable to repay the balance. Unfortunately, most people who owe deficiency judgments are not in a financial position to repay the balance.

Court Determines the Value of the Deficiency

To secure a deficiency judgment, the lender must prove how much the deficiency is worth to the court. An important component here is proof of the home’s fair market value. This value tends to fluctuate with the market and is not always easy to determine.

The lender may also need to show that it sold the house for as much as possible, often based on the fair market value. A lender may not purposefully undervalue a home to increase a homeowner’s deficiency judgment.

Judgment is Issued

The court may issue a judgment on the deficiency amount and whether the homeowner is liable for payment. Remember, the court may determine that the deficiency is not as significant as the lender claims. On the other hand, they might agree with the lender and enforce the full deficiency.

Lender May Collect the Deficiency Judgment

Once the court enters the deficiency judgment, the lender is legally entitled to pursue payment. While enders may not garnish your wages to recoup the deficiency, they may take other actions, like placing liens on other property you own.

Speak to an attorney about your case. There might be a way to avoid liability for the deficiency judgment or reduce it to something more manageable. In some cases, our Philadelphia bankruptcy attorneys might be able to convince the lender to waive the deficiency.

When Pennsylvania Courts Can Issue a Deficiency Judgment Against You

While a deficiency judgment may be a significant hurdle, lenders and creditors have a limited time to seek one.

When Lenders Must File a Petition for a Deficiency Judgment

According to 42 Pa.C.S. § 5522(b), a lender has only 6 months from the date the sheriff’s deed for the foreclosed property is executed to file a petition for a deficiency judgment.

Put another way, once a property is sold at auction, otherwise known as a sheriff’s sale, the lender who foreclosed on the property in the first place must submit a petition to the courts seeking a deficiency judgment no more than 6 months later.

What Happens if a Lender Fails to File a Timely Petition?

While 6 months might sound like more than enough time for a lender to file a petition, it is a tighter turnaround than you might think. Pennsylvania is a judicial foreclosure state. All foreclosure proceedings, including deficiency judgments, must go through the courts.

A lender cannot obtain a deficiency judgment if they do not sue you for one, and they only have 6 months to file the case.

When You Can Block a Deficiency Judgment Petition

Some lenders choose not to pursue the judgment if the deficiency is small. In other cases, lenders might lose track of time and forget to file the claim. If a lender tries to file a petition after 6 months, a lawyer can help you block it for being untimely.

If you believe the lender might come after you in court for a deficiency judgment, contact an attorney immediately, even if no petitions have been filed yet.

Limitations on Deficiency Judgments in Pennsylvania

Since Pennsylvania is a judicial foreclosure state, the lender or creditor must take formal legal action against you to get a deficiency judgment. This often means filing a lawsuit, taking the case to a judge, and having the judge issue a judgment. This can be time-consuming and may give you time to speak with an attorney.

What Happens if You Do Not Pay a Deficiency Judgment?

Deficiency judgments are typically unsecured debts that are not attached to any security or collateral. If it were, it would be considered a secured debt, and you could lose the collateral if you failed to pay.

If your deficiency judgment is unsecured, you might not risk losing much. Pennsylvania does not allow lenders or creditors to garnish wages for unsecured debts. However, if you own other properties, the lender or creditor may place a lien on them.

Calculating Deficiency Judgments

There are limitations on how deficiency judgments are calculated. Generally, deficiency judgments are heavily influenced by the house’s fair market value. Unfortunately, what is considered fair market value can be hard to pin down and may depend on various economic factors. As such, determining fair market value can be objective in some ways but subjective in others.

The lender may try to claim the fair market value is very low, thus increasing the deficiency judgment. Our job, if necessary, is to convince the court that the property is worth more than the lender claims, thus hopefully reducing the deficiency judgment.

What You Can Do About a Deficiency Judgment in Pennsylvania

There might be numerous ways in which to avoid a deficiency judgment. It would be best to talk to a lawyer about your situation immediately, as lenders or creditors might be planning to file a petition for a deficiency judgment as we speak.

Negotiate with Lenders

During the foreclosure process, you may want to talk to the lender with the help of your attorney to reach an agreement regarding a potential deficiency. In some cases, if the deficiency is minor, lenders might be persuaded to forego legal action, take whatever payment they can get from selling the house, and move on without pursuing a deficiency judgment.

Challenge the Deficiency Judgment

Another route is to challenge the deficiency as calculated by the lender. They might try to say the deficiency is far greater than it really is to get more money out of the homeowner. We may present evidence of our own regarding the fair market value of the house.

File for Bankruptcy

One method is to file for bankruptcy. The point of bankruptcy is to repay whatever debts you can and have certain remaining debts discharged. Multiple bankruptcy chapters might be helpful to your situation.

Chapter 7 is a popular choice and helps people liquidate assets, repay debts, and discharge debt. If you have assets you are willing to liquidate, or perhaps you have few assets at all, this might be a good option.

Since a deficiency judgment is an unsecured debt, it can be discharged in a bankruptcy proceeding.

FAQs About Deficiency Judgments in Pennsylvania

What is a Deficiency Judgment?

A deficiency judgment is a determination made by a court of law regarding how much money a borrower still owes a lender after their house is foreclosed. Deficiency judgment often arises when a house is foreclosed and sold for less than what is still owed.

Do I Have to Pay a Deficiency Judgment?

If a judge hands down a deficiency judgment, you are legally liable for payment. Whether the lender actually pursues payment is a different story, though they will likely want to be paid.

How Can I Prevent a Deficiency Judgment?

To prevent a deficiency judgment, you may be able to negotiate with creditors so they can recover some of the debt without taking things to court. You might instead file for bankruptcy or even challenge the deficiency in court.

Is Bankruptcy Preferable to a Deficiency Judgment?

The answer to this question depends on your situation and personal preferences. While bankruptcy can help you avoid having to pay a deficiency judgment, it may come with its own drawbacks to deal with.

How Do I Pay a Deficiency Judgment?

The lender cannot garnish your wages to make you pay, but they may place a lien on other property. This means if you sell that property, the money will be used to pay the lender before you. Your attorney might instead help you work out a payment arrangement with the lender.

Do I Need a Lawyer if I am Facing a Deficiency Judgment?

Yes. While the courts will not force you to hire a lawyer, proceeding without legal representation is not a good idea.

Speak to Our Pennsylvania Bankruptcy Lawyers if You Were Served with Deficiency Judgment Papers

Get in touch with our Quakertown, PA bankruptcy lawyers at Young, Marr, Mallis & Associates to set up a free case assessment by calling (215) 701-6519.