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This question was answered by the Washington Association of REALTORS Attorney,Annie Fitzsimmons. The Legal Hotline lawyer does not represent WashingtonAssociation of REALTORS members or their clients and customers.

QUESTION:

When can a lender take a deficiency judgment against a seller and, conversely,when is a lender prohibited from taking a deficiency judgment?

ANSWER:

First, a deficiency judgment is a court ordered obligation on a borrower to repaymoney to the lender even though and even after the borrowers lender foreclosedthe deed of trust on the real property. The amount of a deficiency judgment is thedifference between what the borrower owed the lender and the sale price of the realproperty at the foreclosure sale.

In Washington state, there is only one way for a lender to take a deficiencyjudgment against a borrower whose repayment obligations are secured by a deed oftrust on real property. The only way lender can take a deficiency judgment is forlender to judicially foreclose the deed of trust. Judicially foreclosing a deed of trustmeans that a lawsuit must be filed by the lender against the debtor. Before theproperty can be sold at the foreclosure sale, there must be pleadings filed in thecourt and hearings conducted. This is not a simple process where notice of theforeclosure sale is given and the property is sold 90 days later at a foreclosure sale.A judicial foreclosure is expensive, time consuming and fairly complicated. As apercentage, very few foreclosures in Washington state, on an annual basis, are

judicial foreclosures.

The far more common type of foreclosure is a non-judicial foreclosure. Rememberthat only judicial foreclosures can result in a deficiency judgment. Accordingly, thevast majority of foreclosures conducted in our state cannot result in a deficiency

judgment against seller. Significantly, real property that is used for agriculturalpurposes must be foreclosed judicially. Agricultural property may not be foreclosednon-judicially. In a non-judicial foreclosure, lender must give notice to seller (andothers, such as junior lien holders and occupants of the property) that the loan is indefault and how the default can be cured. Thirty days after that notice is given,lender must give another notice setting the foreclosure sale for at least 90 dayslater. No other notices are required before the foreclosure sale can happen.

In a non-judicial foreclosure, no deficiency judgment can be taken. However, if the

property owner had a first position creditor and a second position creditor on title tothe property, and the first position creditor foreclosed its deed of trust, the secondposition creditor (and any other subsequent creditors) can still pursue debtor for thedebt owing to those junior creditors, even though debtor no longer owns theproperty that originally secured the junior debt. In other words, a non judicialforeclosure prevents the creditor whose deed of trust was foreclosed from seekingrepayment from debtor of any portion of the foreclosed debt, however, any otherdebt that was also secured by the property and unpaid as a result of the foreclosure

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sale, can be sought from debtor by the remaining creditors. In a deed in lieu offoreclosure scenario, the debtor and lender negotiate a settlement in which thecreditor takes title to the property from debtor and creditor gives something todebtor in exchange.

What creditor gives to debtor will vary from case to case but it typically involves

some reduction in funds owing, such as penalties and interest, and could include areduction in principal. It is possible that debtor will emerge from a deed in lieuscenario and still owe creditor funds, but if that is the case, it would be the result ofa negotiated agreement between creditor and debtor. It would not be a deficiency

judgment. Note that a deed in lieu of foreclosure is not a likely outcome if there areany junior encumbrances on title because the creditor takes title from the debtorsubject to all recorded encumbrances. In other words, the first position lender givesup its first position lien and takes whatever position of ownership is next in linebased on all recorded encumbrances. If there are debts recorded against title to theproperty other than the creditors who is agreeing to the deed in lieu, the creditorwill not agree to a deed in lieu.

In a short sale scenario, debtor and creditor enter a negotiated agreement where

debtor conveys the property to a third party buyer and creditor releases some or all

of the debt secured by the deed of trust so that the third party buyer can take clear

title to the property. The released debt may or may not remain an ongoing liability

for debtor, again, depending on the negotiated agreement between debtor and

creditor. If the property was encumbered with multiple liens or deeds of trust, the

holders of all of the liens and deeds of trust must agree to release whatever portion

of their encumbrance will not be paid by the sale of the property to a third party

and may or may not have the ability to pursue the debtor based on their short sale

agreement with debtor.

Again, any obligation remaining from debtor to creditor is the resulted of agreementand not a deficiency judgment. There is only one mechanism for a lender to take adeficiency judgment and that is a judicial foreclosure. Nonetheless, there are avariety of ways in which a debtor can emerge from a default situation and continueto owe the creditor or creditors unpaid debt.