If you go through a foreclosure in Connecticut, you could be on the hook for a “deficiency judgment.” Read on to get an overview of what a deficiency judgment is and when a bank can get one against you in Connecticut.
Two Types of Connecticut Foreclosures: Foreclosure By Sale and Strict Foreclosure
In Connecticut, foreclosures are either: foreclosure by sale or strict foreclosure. Both types of foreclosure go through a court.
Foreclosure by sale. In a foreclosure by sale, which is a typical judicial foreclosure, a bank files a lawsuit to foreclose. If the bank wins the case, the court orders the home sold at a foreclosure sale. The proceeds from the sale then go to the bank to repay the outstanding debt.
Strict foreclosure. Only two states in the country—Connecticut and Vermont—allow strict foreclosures. In a strict foreclosure, a bank files a lawsuit to begin the foreclosure process. But if the bank wins the case, the court does not order a foreclosure sale. Instead, the court transfers the home's title directly to the foreclosing bank.
Deficiency Judgments: Owing Money to the Bank After Foreclosure
When you sign a mortgage as part of a home loan transaction, you give the bank that's lending you the money the right to foreclose if you don’t make the payments. At a foreclosure sale, the bank typically bids on the home with a “credit bid.” This means the bank bids the amount of the debt owed rather than cash. Sometimes the bank bids the full amount of the debt—called a "full credit bid"—but other times the bank bids less than the full amount of the debt.
When the bank—or another party—buys the home at a foreclosure sale for less than the borrower owes, the difference between the sale price and the total debt is the deficiency.
Example. Suppose Connie borrows money from a bank to buy her home. She borrows $300,000, but eventually loses her job and stops making payments on the loan. The bank forecloses. At the foreclosure sale, the bank is the high bidder with a credit bid in the amount of $270,000. The amount of the deficiency is $30,000.
Some states, like Connecticut, give the bank the right to get a deficiency judgment—a personal judgment—against a borrower in the amount of the deficiency. The bank then often uses standard collection methods, like garnishing wages or levying a bank account, to collect the amount owed.
Deficiency Judgments Are Allowed in Connecticut Foreclosures
In Connecticut, a bank can get a deficiency judgment against a borrower in either a foreclosure by sale or strict foreclosure.
Deficiency judgments in strict foreclosures. In a strict foreclosure, a bank can ask the court for a deficiency judgment within 30 days after the redemption period expires.
The way a court calculates a deficiency in a strict foreclosure is a bit different than the process described in our example above. The deficiency judgment in a strict foreclosure is limited to the difference between the total debt minus the fair market value of the property, which the judge determines.
Deficiency judgments are also allowed in a foreclosure by sale. Though, if the home is sold at a foreclosure sale for less than the appraised value, the bank must credit the borrower with one-half the difference between the selling price and the appraised value.
If you’re about to go through a foreclosure in Connecticut, consider consulting with a foreclosure attorney to find out if the bank is likely to seek a deficiency judgment against you in your circumstances. A foreclosure attorney can also inform you about the options to avoid foreclosure that might be available to you, like a modification, forbearance agreement, or repayment plan. If you can’t afford to hire a lawyer, talk to a HUD-approved housing counselor.