Deficiency judgment

Key Takeaways

• A deficiency judgment is a personal money judgment against the borrower for the gap between the debt and what the foreclosure sale brought in.
• Washington bars a deficiency judgment against a borrower, grantor, or guarantor after a nonjudicial trustee's sale under a deed of trust (RCW 61.24.100).
• A lender that wants to preserve the shortfall claim on a home has to foreclose in court as a mortgage instead of using the trustee's sale process.
• After a judicial foreclosure the redemption period is one year, and it drops to eight months when the judgment creditor expressly waived any right to a deficiency (RCW 6.23.020).

What It Means

A deficiency judgment is a court order that makes a borrower personally pay the shortfall left over when a foreclosure sale brings less than the debt. Suppose the loan balance plus costs is $400,000 and the sale produces $340,000. The $60,000 gap is the deficiency, and in a state that allows it, the lender can sue for that money and collect it from wages, bank accounts, or other property.

Washington is not that state for most home loans. Nearly every residential loan here is secured by a Deed Of Trust rather than a mortgage, and nearly every Foreclosure runs through a nonjudicial trustee's sale rather than a lawsuit. That choice has a price for the lender: once the trustee sells, the shortfall is gone. The practical effect is that the sale is the end of the matter for the homeowner, which is why a Washington borrower who cannot save the house is often better off letting the trustee's sale happen than signing paperwork that leaves the claim alive. Any deal reached before the sale, including a Short Sale or a deed in lieu, needs written language dealing with the shortfall.

How It Works in Washington

RCW 61.24.100 states the rule plainly: a deficiency judgment shall not be obtained on the obligations secured by a deed of trust against any borrower, grantor, or guarantor after a trustee's sale. The bar attaches to the nonjudicial process, not to the kind of property, so the same lender holding the same deed of trust could foreclose judicially and ask a court for the shortfall. Narrow exceptions exist for commercial loans, mainly for waste that lowered the property's value and for rents or insurance proceeds the borrower wrongfully kept, and those exceptions do not reach a borrower's principal residence.

Two related deadlines belong in the same file. Under RCW 61.24.090 the borrower can cure the Default and reinstate the loan at any time prior to the eleventh day before the date set for the sale. Under RCW 6.23.020, after a judicial foreclosure of a non-agricultural mortgage, the redemption period is eight months when the judgment creditor expressly waived any right to a deficiency, and one year otherwise. Brokers who work distressed files should also read our guide to short sales in Washington, since the shortfall question is settled by contract there rather than by statute.

Example

Dana Whitfield owes $412,000 on a deed of trust secured by her Tacoma house. She loses her job, misses six payments, and the trustee sets a sale. Dana could have stopped it by curing the default before the eleventh day ahead of the sale date under RCW 61.24.090, but she cannot raise the arrears. At the trustee's sale the high bid is $355,000.

The lender is $57,000 short. Because the sale was a nonjudicial trustee's sale, RCW 61.24.100 bars a deficiency judgment, so the lender absorbs the $57,000 and Dana owes nothing more on that loan. Had the lender instead filed a judicial foreclosure and won a decree, it could have asked the court for that $57,000, and Dana would have had a full year to redeem rather than the eight months that apply when the creditor waives the deficiency.

Common Mistakes and Exam Traps

• The bar in RCW 61.24.100 attaches to the nonjudicial trustee's sale, not to the type of property. The same lender can still pursue a shortfall if it forecloses the same deed of trust judicially.
• Reinstatement and redemption are different rights at different times. Reinstatement cures the default before the sale, up to the eleventh day before it. Redemption buys the property back after a judicial sale.
• A deed in lieu of foreclosure does not automatically erase the shortfall. The lender gives that up only if the agreement says in writing that it is waiving the deficiency.
• The Washington bar covers a borrower, grantor, or guarantor, but commercial loans carry narrow exceptions for waste and for wrongfully retained rents or insurance proceeds under RCW 61.24.100.