A deficiency judgment is a judgment entered against a borrower after foreclosure of a secured debt when proceeds from sale of the collateral fail to fully satisfy the debt. A deficiency judgment against the borrower is prohibited by ORS 86.770(2) after non-judicial foreclosure of a trust deed on real property that is held as collateral security. This statute was changed in 2013; current statute is ORS 86-797. This non-judicial foreclosure process is referred to as “advertisement and sale” in Oregon. However, the antideficiency statute only applies after a foreclosure and does not apply when the note holder waives the security and sues directly on the note.  This is made clear in Beckhuson v. Frank, 97 Or App 347, 775 P2d 923 (1989), see also the case of In Re Daraee 279 B.R. 853, a 2002 Oregon Bankruptcy Court opinion.

Deficiency judgments are uncommon for first priority home loans in Oregon. Lenders normally prefer to foreclose and sell the collateral in a nonjudicial proceeding to quickly recover as much as they can, without the expense and delay of a judicial proceeding. However, a recoverable deficiency could arise if the property is voluntarily sold by the home owner in a short sale. A short sale is the sale of property for a price that is less than the balance due on the debt secured against it. A lender could agree to release or “waive” its security in exchange for partial payment of its note. Unless the lender agreed to fully extinguish the debt, it could sue on the note balance and collect any amount that remained unpaid.

A deficiency judgment is an even more likely prospect when a second priority trust deed or mortgage is involved. Home equity lines of credit, often referred to as HELOCs, were very popular when home values were increasing rapidly. Consumers were encouraged by lenders to access the equity that had built up in their homes to pay other consumer debt, pay educational expenses for their children, remodel their homes or even to make speculative investments. If the first trust deed on a home is foreclosed, and the sale proceeds are insufficient to pay the balance due, there is nothing left to pay the second trust deed holder. In such a situation, the subordinate debt no longer has any collateral security and in most cases the lender will sue to collect the balance due if it is not voluntarily paid by the borrower.

Not long ago I was contacted by an unhappy former homeowner who sold the home on a short sale to satisfy the first trust deed.  The holder of the second trust deed agreed to the sale and released its secured interest in the property without being paid. After the sale, the borrower thought all debt associated with the home had been resolved until a demand letter arrived. The holder of the note that was previously secured by a second trust deed now wanted to be paid. Only the security had been waived and the note balance could still be collected. A bankruptcy was the only alternative to payment.

I discussed this problem with a lawyer who represents many large, national lenders in foreclosure proceedings.  He told me that the standard short sale documents his clients offer to homeowners are silent (say nothing) about waiver of a deficiency. This means that, unless the borrower insists on a full release, and language to that effect is added to the documentation, a deficiency judgment may be pursued after the sale. Bankruptcy lawyers may soon see many unhappy former homeowners looking for a solution to an unexpected problem.