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 might be left of the initial loan that has not been paid back 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, which might not be set in stone. Deficiency judgments may be limited in certain ways. They are typically unsecured debts that can only be obtained with 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.
For help before, during, and after foreclosure proceedings, contact our Pennsylvania bankruptcy attorneys at Young, Marr, Mallis & Associates to schedule a free case review by calling (215) 701-6519.
What is a Deficiency Judgment in Pennsylvania?
When a home or other real property is foreclosed upon, the creditor or lender, usually a bank, sells the property to recoup their losses. It is very common for lenders to sell the houses for less than what the initial loan was worth, leaving an unpaid balance.
This unpaid balance is known as a deficiency balance. For example, suppose you took out a loan to buy a home for $300,000. 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. This means only $275,000 of the loan has been repaid. There would be a deficiency balance of $25,000.
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.
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 to overcome, lenders and creditors have a limited time to seek 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.
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.
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 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
As mentioned, 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 before a judge, and getting the judge to issue the judgment. This can be time-consuming and might allow you time to speak to an attorney about what to do.
Deficiency judgments are typically unsecured debts. This means the debt is not attached to some sort of security or collateral. If it were, it would be considered a secured debt, and you could lose the collateral. 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 put a lien on those properties.
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.
How to Avoid 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.
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 okay with liquidating, 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 by the court in a bankruptcy hearing.
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.