A deficiency judgment in California is a court order making a former homeowner pay the gap between the loan balance and what the foreclosed home brought. California's anti-deficiency laws prevent that in most home foreclosures, but not all: judicial foreclosures, some refinanced or cash-out loans, second mortgages wiped out by a senior sale and business borrowers can fall outside the protections.
If a lender, collector or law firm is demanding money after a foreclosure or short sale, call (415) 754-0115 to arrange a free consultation, or use the contact page. Deadlines to respond to a lawsuit are short.
Why most California homeowners never face a deficiency
California has some of the strongest borrower protections in the country. Three statutes in the Code of Civil Procedure do most of the work.
Trustee sales: section 580d
Most California foreclosures are non-judicial: a trustee sells the property at auction under the power of sale in the deed of trust, without a lawsuit. When a lender chooses that faster route, section 580d generally bars it from getting a deficiency judgment on the loan it foreclosed. The trade-off for the lender is speed in exchange for giving up the shortfall.
Purchase-money loans: section 580b
A loan used to buy a one-to-four unit home that the borrower occupies is generally "purchase money." No deficiency is allowed on it, whichever foreclosure method is used. Seller-financed loans are also protected. Since 2013, the statute has also covered certain refinances of those purchase loans, but only up to the amount used to pay off the original purchase-money principal.
Approved short sales: section 580e
When a lender consents in writing to a short sale of a one-to-four unit residence, section 580e generally prevents it from pursuing the rest of that loan afterward. Our article on a short sale versus foreclosure compares that route with letting the sale go ahead.
When a deficiency judgment in California is still possible
The protections are strong, but they have edges. These are the situations that most often lead to post-foreclosure claims.
Judicial foreclosure
A lender may sue to foreclose instead of using a trustee sale. Judicial foreclosure is slower and less common for homes, but if the loan is not purchase money, it can lead to a deficiency.
The fair value hearing
After a judicial sale, the lender must apply for a deficiency within three months. The court holds a hearing on the property's fair value, and the deficiency is limited to the debt minus the greater of the fair value or the sale price. That rule stops a lender from buying cheaply at auction and then charging the borrower for the difference. A borrower in a judicial foreclosure also has a post-sale right of redemption.
Cash-out refinances and HELOCs
Money borrowed against a home for purposes other than buying it, such as a cash-out refinance above the original purchase balance, a home equity loan or a HELOC used for other expenses, generally is not purchase money. Section 580d still helps if that lender forecloses by trustee sale, but not in every scenario.
The "sold-out junior" lienholder
When the first lender forecloses, a second mortgage or HELOC lender's lien is usually wiped out. Because that junior lender did not conduct the sale, section 580d does not protect the borrower against it. If the junior loan is not purchase money, the lender or a debt buyer may sue on the promissory note as an unsecured debt, subject to California's statute of limitations. Many homeowners are surprised by a second-lender lawsuit years after losing the home.
Business borrowers, fraud and waste
Protections can be narrower where the borrower is a corporation or LLC, where the loan was obtained by fraud, or where the owner damaged the property ("waste").
The one-action rule
California's one-action rule (Code of Civil Procedure section 726) generally requires a lender with a real estate-secured loan to pursue the property first, in a single action, rather than suing the borrower personally and ignoring the collateral. Violations can have serious consequences for the lender, and the rule sometimes becomes a defense when a lender tries to shortcut the process.
Tax effects of a foreclosure shortfall
Even when no one can collect the balance, the IRS may still see income. A lender that cancels debt may issue a Form 1099-C. The outcome depends on whether the loan was recourse or nonrecourse, whether you were insolvent when the debt was canceled, and whether a federal exclusion for forgiven debt on a principal residence applied in that tax year; that exclusion has been extended and allowed to lapse at different times. California has its own conformity rules. Speak to a tax professional before filing the return that covers the foreclosure year.
If you are being pursued for a deficiency
Start by gathering the loan documents, the trustee's deed or short sale approval, and every letter or lawsuit you have received. An attorney can then check which loan the claim relates to, whether it was purchase money, how the property was sold, whether the claim is time-barred and whether the one-action rule was followed. If a valid debt remains, options may include negotiation, bankruptcy protection, which can discharge many deficiency debts, or a defense in court.
The Somal Law Firm handles foreclosure defense, mortgage disputes, debt settlement and bankruptcy for people across Pleasanton, the Tri-Valley and Alameda and Contra Costa Counties. Attorney Bob Somal can review the loan and sale documents and explain the choices in plain language.
Frequently asked questions
Can a bank garnish my wages after a foreclosure in California?
Only if it first obtains a money judgment. After a typical trustee sale of a purchase-money home loan, no deficiency is allowed, so wage garnishment on that loan should not follow.
Is my HELOC protected after foreclosure?
It depends on how the money was used and who foreclosed. A HELOC used to help buy the home may be purchase money; one used for other expenses usually is not. An attorney can review the loan history.
Does a deed in lieu protect me from a deficiency?
Not automatically. It depends on the agreement's release language and the type of loan, so get the waiver in writing before signing.
A deficiency claim can be weaker than the demand letter suggests, but only a review of the loan and sale records will show that. Call (415) 754-0115 to schedule a free consultation with The Somal Law Firm in Pleasanton. Bring the collection letter or lawsuit and any foreclosure or short sale paperwork, and we will identify the loan, the protections that may apply and the deadline you are working against. Messages can also be sent through our contact page.
Attorney Advertising. This article is general legal information for Bay Area residents, not legal advice, and does not create an attorney–client relationship. Every situation is different — please consult a licensed attorney about your specific circumstances.