Do You Owe Money After a Foreclosure in California?

What a deficiency is

A deficiency is the gap between what you owe and what the home brings at the foreclosure sale. If you owe $600,000 and the home sells for $500,000, the deficiency is $100,000. Whether you can be made to pay it depends on the type of foreclosure and the type of loan.

Joe's read on today's market

Joe compares today with the last foreclosure wave: "It's the same thing we saw in 2007, but just flipped around." Back then, many owners had credit but no equity. Today, many have equity but are short on credit. That equity is exactly what a foreclosure can wipe out, which is why acting before the sale matters.

Nonjudicial foreclosure: the common case

Most California residential foreclosures are handled out of court by a trustee under the deed of trust's power of sale. That is the Notice of Default, Notice of Sale and auction process described in our foreclosure timeline.

After a nonjudicial foreclosure, Code of Civil Procedure section 580d generally bars the foreclosing lender from obtaining a deficiency judgment. That is a major protection, and one reason most lenders in California foreclose this way: it is faster, but it ends their claim on that loan.

Purchase money loans

Code of Civil Procedure section 580b adds protection for purchase money loans, meaning loans used to buy an owner-occupied one to four unit home, and seller-financed loans. No deficiency is allowed on those even in a judicial foreclosure. Refinanced purchase loans made on or after January 1, 2013 can keep that protection, but not for new money taken out beyond the original purchase loan or for refinance costs.

When you might still owe

• A second mortgage or HELOC. When the first lender forecloses, the junior lien is usually wiped out, but the junior lender may be able to sue on the note, depending on the facts. In 2019 the California Supreme Court held in Black Sky Capital, LLC v. Cobb that a holder of both loans could seek a deficiency on the extinguished junior lien.
• Judicial foreclosure. If a lender forecloses through the courts, a deficiency judgment can be allowed for non purchase money loans. The lender must apply within three months of the sale, and the court holds a fair value hearing.
• Deed in lieu. California has no statute barring a deficiency after a deed in lieu, so you need a written waiver.
• Taxes. Forgiven debt can create a tax bill. Talk to a CPA.

This is general information, not legal or tax advice. Talk to a California attorney, a CPA, or a HUD-approved housing counselor about your situation.

Could there be money left over for you?

Sometimes. If the auction brings more than what is owed to the foreclosing lender and costs, the extra goes first to junior lienholders and then to the former owner. Under Civil Code section 2924j, the trustee must send notice to people with a recorded interest within 30 days after the trustee's deed, and claims must be submitted within 30 days after that notice is sent. Watch your mail, and if you moved, make sure the trustee can find you.

Better still, if you have equity, don't let the auction decide what you get. A sale before the auction lets you keep the equity. See your selling options.

If a sale date is coming, do this now

1. Get a copy of every loan on the property, including any second mortgage or HELOC, and note whether each was used to buy the home or taken out later.
2. Ask the servicer for a payoff and reinstatement quote in writing.
3. Get a realistic market value. If the home is worth more than you owe, you have equity to protect.
4. Talk to an attorney about your specific loans, and a CPA about taxes.
5. Compare the options: a modification, a short sale, a sale before the auction, or an AB 2424 postponement to buy time to sell.

Each of those options has its own deadline, so make the decision early rather than at the last minute.

The bigger picture

Even without a deficiency, a foreclosure is expensive. Fannie Mae guidelines generally require a 7 year wait after a foreclosure before a new conventional loan, versus 4 years after a short sale. That is why Joe Hall's first question is always whether you can stay, and if not, how to leave on your own terms before the auction.