Foreclosure followed by a deficiency lawsuit in North Carolina?
Will I be sued for a deficiency judgment in NC?
Foreclosure followed by a deficiency lawsuit in North Carolina?
In addition to numerous questions on the mortgage modification process, I am often asked whether a homeowner can be sued after foreclosure for the balance of the home loan. That answer depends on state law, which matters more and more with people losing investment properties in various states.
Many states have what is called an anti-deficiency statute, which prevents a mortgage holder from suing the borrower for an outstanding balance after foreclosure. North Carolina does have a limited anti-deficiency statute. The limitation is that the mortgage holder had to have sold the borrower the house, which is a rare circumstance. These are often referred to as seller-financed loans. North Carolina also allows the borrower to dispute whether the lender sold the home for fair value after foreclosure in the case of a primary residence.
Reacting to the foreclosure crisis the North Carolina legislature enacted NCGS 45-21.38A (provided below) which abolishes certain deficiency judgments: (1) rate spread loans as defined in the statute below, and (2) non-traditional mortgage loans. Despite this additional limited protection for borrowers lenders may have found a way to avoid this new statute by suing on the note PRIOR to foreclosure. In any event it appears borrowers are still exposed to possible lawsuits when they decide to walk away from a house and loan.
As a Charlotte Bankruptcy Attorney, I often file bankruptcy for people looking to avoid a potential house deficiency lawsuit. That being said few ever make the decision to file based solely on a house deficiency. Other possible options include a deed-in-lieu of foreclosure, short sale, or loan modification. For those who are able to reach an agreement with their mortgage company there is always the possibility of 1099 tax liability. The Mortgage Debt Relief Act of 2007 applies to qualified principal residence indebtedness forgiven in calendar years 2007 through 2012, and may offer tax relief. As this foreclosure crisis continues, it is important to consider all options and seek legal advice before deciding to walk away from a home.
Jason Witt, Charlotte Bankruptcy
§ 45 21.38A.
Deficiency judgments abolished where mortgage secured by primary residence.
(a) As used in this section, the term “nontraditional mortgage loan” means a loan in which all of the following apply:
(1) The borrower is a natural person.
(2) The debt is incurred by the borrower primarily for personal, family, or household purposes.
(3) The principal amount of the loan does not exceed the conforming loan size for a single family dwelling as established from time to time by Fannie Mae.
(4) The loan is secured by: (i) a security interest in a manufactured home, as defined in G.S. 143 145, in the State that is or will be occupied by the borrower as the borrower’s principal dwelling; (ii) a mortgage or deed of trust on real property in the State upon which there is located an existing structure designed principally for occupancy of from one to four families that is or will be occupied by the borrower as the borrower’s principal dwelling; or (iii) a mortgage or deed of trust on real property in the State upon which there is to be constructed using the loan proceeds a structure or structures designed principally for occupancy of from one to four families that, when completed, will be occupied by the borrower as the borrower’s principal dwelling.
(5) The terms of the loan: (i) permit the borrower as a matter of right to defer payment of principal or interest; and (ii) allow or provide for the negative amortization of the loan balance.
(b) Except as provided in subdivision (6) of subsection (c) of this section, this section applies only to the following loans:
(1) A loan originated on or after January 1, 2005, that was at the time the loan was originated a rate spread home loan as defined in G.S. 24 1.1F.
(2) A loan secured by the borrower’s principal dwelling, which loan was modified after January 1, 2005, and became at the time of such modification and as a consequence of such modification a rate spread home loan.
(3) A loan that was a nontraditional mortgage loan at the time the loan was originated.
(4) A loan secured by the borrower’s principal dwelling, which loan was modified and became at the time of such modification and as a consequence of such modification a nontraditional mortgage loan.
(c) This section does not apply to any of the following:
(1) A home equity line of credit as defined in G.S. 45 81(a).
(2) A construction loan as defined in G.S. 24 10(c).
(3) A reverse mortgage as defined in G.S. 53 257 that complies with the provisions of Article 21 of Chapter 53 of the General Statutes.
(4) A bridge loan with a term of 12 months or less, such as a loan to purchase a new dwelling where the borrower plans to sell his or her current dwelling within 12 months.
(5) A loan made by a natural person who makes no more than one loan in a 12 month period and is not in the business of lending.
(6) A loan secured by a subordinate lien on the borrower’s principal dwelling, unless the loan was made contemporaneously with a rate spread home loan or a nontraditional mortgage loan that is subject to the provisions of this section.
(d) In addition to any statutory or common law prohibition against deficiency judgments, the following shall apply to the foreclosure of mortgages and deeds of trust that secure loans subject to this section:
(1) For mortgages and deeds of trust recorded before January 1, 2010, the holder of the obligation secured by the foreclosed mortgage or deed of trust shall not be entitled to any deficiency judgment against the borrower for any balance owing on such obligation if: (i) the real property encumbered by the lien of the mortgage or deed of trust being foreclosed was sold by a mortgagee or trustee under a power of sale contained in the mortgage or deed of trust; and (ii) the real property sold was, at the time the foreclosure proceeding was commenced, occupied by the borrower as the borrower’s principal dwelling.
(2) For mortgages and deeds of trust recorded on or after January 1, 2010, the holder of the obligation secured by the foreclosed mortgage or deed of trust shall not be entitled to any deficiency judgment against the borrower for any balance owing on such obligation if: (i) the real property encumbered by the lien of the mortgage or deed of trust being foreclosed was sold as a consequence of a judicial proceeding or by a mortgagee or trustee under a power of sale contained in the mortgage or deed of trust; and (ii) the real property sold was, at the time the judicial or foreclosure proceeding was commenced, occupied by the borrower as the borrower’s principal dwelling.
(e) The court may, in its discretion, award to the borrower the reasonable attorneys’ fees actually incurred by the borrower in the defense of an action for deficiency if: (i) the borrower prevails in an action brought by the holder of the obligation secured by the foreclosed mortgage or deed of trust to recover a deficiency judgment following the foreclosure of a loan to which this section applies; and (ii) the court rules that the holder of the obligation secured by the foreclosed mortgage or deed of trust is not entitled to a deficiency judgment under the provisions of this section. The amount of attorneys’ fees to be awarded shall be determined without regard to the provisions of the loan documents, the provisions of G.S. 6 21.2, or any statutory presumption as to the amount of such attorneys’ fees. (2009 441, s. 1.)
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Does the same apply to a short sale, as well?
A short sale does not necessarily relieve the borrower of an obligation unless the agreement does so. Same applies with deed in lieu of foreclosure
My lender denied my request for short sale as there was no contract. My townhouse was my primary residence, but is now empty, on the market but no contract. I’m unemployed, drawing unemployment (for about 12 more weeks) and social security of $1343/mo. I owe about 157K w/new sales in neighborhood of 137k – 152K.- which will kill my appraisal. My contract runs out in March, at which time I will have no way to make payments. If foreclosure takes place can I be sued for deficieny balance? Can lender force me to use my brokerage money that is not my IRA–just my emergency fund? If lender accepts home for short sale, will I be liable for remaining balance? I live in NC.
You would likely need to have a consultation with a bankruptcy lawyer to find out your exposure. An attorney would need to review your loan docs and brokerage balance.
Is there a time limit as to when they can/have to come after you for a definciency payment? We keep waiting to hear from them or see our tax return dissapear, but nothing yet. We forclosed Summer of 2010. Thanks.
Could be as short as one (1) year after the foreclosure is finalized in North Carolina (varies state by state). See #6 below:
Statute of Limitations:
North Carolina General Statute § 1‑54. One year.
Within one year an action or proceeding –
(1) Repealed by Session Laws 1975, c. 252, s. 5.
(2) Upon a statute, for a penalty or forfeiture, where the action is given to the State alone, or in whole or in part to the party aggrieved, or to a common informer, except where the statute imposing it prescribes a different limitation.
(3) For libel and slander.
(4) Against a public officer, for the escape of a prisoner arrested or imprisoned on civil process.
(5) For the year’s allowance of a surviving spouse or children.
(6) For a deficiency judgment on any debt, promissory note, bond or other evidence of indebtedness after the foreclosure of a mortgage or deed of trust on real estate securing such debt, promissory note, bond or other evidence of indebtedness, which period of limitation above prescribed commences with the date of the delivery of the deed pursuant to the foreclosure sale: Provided, however, that if an action on the debt, note, bond or other evidence of indebtedness secured would be earlier barred by the expiration of the remainder of any other period of limitation prescribed by this subchapter, that limitation shall govern.
(7) Repealed by Session Laws 1971, c. 939, s. 2.
(7a) For recovery of damages under Article 1A of Chapter 18B of the General Statutes.
(8) As provided in G.S. 105‑377, to contest the validity of title to real property acquired in any tax foreclosure action or to reopen or set aside the judgment in any tax foreclosure action.
(9) As provided in Article 14 of Chapter 126 of the General Statutes, entitled “Protection for Reporting Improper Government Activities”.
(10) Actions contesting the validity of any zoning or unified development ordinance or any provision thereof adopted under Part 3 of Article 18 of Chapter 153A or Part 3 of Article 19 of Chapter 160A of the General Statutes or other applicable law, other than an ordinance adopting or amending a zoning map or approving a special use, conditional use, or conditional zoning district rezoning request. Such an action accrues when the party bringing such action first has standing to challenge the ordinance; provided that, a challenge to an ordinance on the basis of an alleged defect in the adoption process shall be brought within three years after the adoption of the ordinance. (C.C.P., s. 35; Code, s. 156; 1885, c. 96; Rev., s. 397; C.S., s. 443; 1933, c. 529, s. 1; 1951, c. 837, s. 2; 1965, c. 9; 1969, c. 1001, s. 2; 1971, c. 12; c. 939, s. 2; 1975, c. 252, s. 5; 1977, c. 886, s. 3; 1983, c. 435, s. 38; 1989, c. 236, s. 4; 2001‑175, s. 1; 2011‑384, s. 1.)