Some homeowners may have to pay the lender the difference between what they owe on their house and how much the lender recovers during the foreclosure process. This is known as a deficiency judgment.
When someone can no longer pay their mortgage, they risk losing their home through a legal process called foreclosure. For some homeowners, they also risk being liable to the bank or other lender for any “deficiency” remaining once their home is sold.
A deficiency is the difference between the total amount the homeowner owes to the bank and the value of the home. Imagine a homeowner owed $500,000 on their mortgage, their lender starts foreclosure proceedings and sells the house for $400,000. There would be a deficiency of $100,000. Sometimes the homeowner will be liable to pay this amount.
This article will:
- describe who is liable for a deficiency judgment and what types of mortgages allow for deficiency judgments,
- explain the process by which a lender gets a deficiency judgment and what happens after the court grants the judgment, and
- provide some suggestions about what you can do if you are facing a deficiency judgment.
Please note that the laws governing mortgages differ from province to province. This article deals with the laws that apply in Alberta only.
Who is liable for deficiency judgment in Alberta?
A borrower may be liable to pay the deficiency judgment. If multiple people borrowed the money together, all the borrowers listed on the mortgage will be liable. The lender can pursue the entire deficiency amount from any of the borrowers, or from all of them collectively. The lender will get judgment against all of the borrowers. The insurer (see below) then decides who it will pursue to collect the amount.
A person might also be liable for the deficiency judgment if they are a guarantor. A guarantor is someone who signed an agreement with the lender, promising the lender that either the borrower or the guarantor would repay the loan. This agreement is called a personal guarantee. If the borrower defaults on the mortgage, the person who guaranteed the mortgage may be liable. You can read more about being a guarantor on CPLEA’s website.
What types of mortgages allow for deficiency judgments?
Whether a borrower will be liable for a deficiency judgment depends on the type of mortgage they have. Individuals with a “high-ratio, insured mortgage” or a mortgage granted under the National Housing Act can be liable for deficiency judgments. Individuals with a conventional mortgage cannot.
Generally, if a person borrows more than 80% of the purchase price of their house (in other words, if their down payment was less than 20%) they will have a high-ratio, insured mortgage and could be liable for a deficiency judgment. Read more about these different mortgage types in our previous article: High Ratio vs Conventional Mortgages.
Corporations who borrow money using a mortgage are always liable for a deficiency judgment. If a corporation transfers its mortgage to an individual, the individual might also be liable for the deficiency, depending on how they are using the property. The individual will not be liable for a deficiency judgment if they or a family member is using the property as a personal residence or a home. An individual may be liable for a deficiency judgment if they are using the property for another purpose, for example, as a rental property.
How is a deficiency judgment granted?
A deficiency judgment is a court order. If the lender wants a deficiency judgment, they must let the borrower know they are going to court to ask for it. The lender will usually include their claim for a deficiency judgment in the initial document they file to start foreclosure proceedings. This document is called a Statement of Claim.
Before it can grant a deficiency judgment, a court needs evidence of how much the borrower owes and how much the home is worth. The deficiency judgment is for the difference between these two numbers.
How much the borrower owes includes the initial amount of the mortgage (the principal) and the interest that has accrued on the principal. Additionally, most mortgages say the borrower must pay the lender’s legal costs if the borrower breaches any terms of the mortgage (for example, by missing mortgage payments). Thus, the total amount owing will also include the lender’s legal costs. It can also include outstanding taxes and condo fees. The amount owing should account for all payments the borrower made. A borrower should double-check the lender’s calculations to ensure the amount owing is accurate.
How much the home is worth is usually determined in one of two ways. If the lender has sold the home to a new purchaser, the home is worth whatever price the new purchaser is willing to pay. If the lender has ‘bought’ the home itself, they must provide the court with evidence of the home’s value. Usually, a real estate appraiser provides this evidence in a document called an Affidavit of Value. A homeowner who disagrees with the appraised value of their home can give their own evidence to the court. This means hiring a real estate appraiser to value the home.
What happens after a judgment is entered?
If the court determines that:
- the debtor owes more on the mortgage than the house is worth, and
- the type of mortgage allows for deficiency judgment,
then it may issue a deficiency judgment against the borrower. This judgment is a court order setting out how much the borrower must pay the lender.
It is rare for a lender to collect a deficiency judgment itself. Most mortgages that allow for deficiency judgments are insured. The insurance protects the lender against the deficiency. When the court grants a deficiency judgment, the insurer pays the amount of the judgment to the lender. In exchange, the lender assigns its judgment to the insurer, meaning the insurer can then try to collect the amount from the borrower.
An insurer can use different tools to collect the outstanding amount owing from the borrower, who is also called a debtor. The insurer may collect a portion of the debtor’s wages, garnish their bank account, or seize and sell other property the debtor owns, such as a car. An insurer might be willing to set up a payment plan with the debtor, so that the debtor can pay back the deficiency judgment over time. An insurer might also be willing to settle the debt by accepting less than the full amount owing to satisfy the judgment.
A deficiency judgment will be reported on the borrower’s credit report in Alberta and will negatively impact the borrower’s credit score. The borrower may have difficulty borrowing money in the future.
How long does the deficiency judgment last?
Deficiency judgments last for ten years. Before the ten years is up, a lender or insurer can apply to court to renew the deficiency judgment. They can do this repeatedly until the borrower pays the judgment. If more than ten years have passed since the court granted the judgment and if the lender or insurer does not renew the judgment during that time, the judgment is “limitation barred.” This means a lender or insurer can no longer collect on the judgment. If they still try to collect on the judgment, the borrower can defend itself against the lender or insurer.
Borrowers facing a deficiency judgment might consider personal insolvency options, including bankruptcy or a consumer proposal. These options will allow the borrower to write off or write down the deficiency judgment. However, timing is important. A borrower will not be able to write off or write down the deficiency judgment if a borrower starts insolvency proceedings too early.
Steps you can take as a borrower
After you default on your mortgage:
- Talk to your lender about whether you can bring your mortgage back into good standing.
- Sell your house yourself. You may be able to get a better price for your house than the lender will, and that can reduce any deficiency you end up owing.
- Contact a lawyer or the Alberta Debtor Support project to get legal advice and explore your options.
When the lender applies for a deficiency judgment:
- Confirm what type of mortgage you have. Remember that lenders cannot get a deficiency judgment on a conventional mortgage made to an individual.
- Review the lender’s calculation of how much you owe.
- If the lender is “purchasing” your home, review their Affidavit of Value. If you disagree with the valuation, consider getting your own appraisal done.
- Try not to raise legal arguments in court unless they have merit. Remember that you have to pay the lender’s legal costs. At the same time, there may be points that are important for you to raise with the court. Knowing the difference between a good and a weak legal argument is difficult. If possible, get legal advice.
After the court grants a deficiency judgment:
- Confirm with the lender which insurer will be taking over the judgment.
- Contact the insurer and see if they are willing to negotiate a payment plan or a settlement. Note that an insurer will normally not talk to you until the lender assigns the judgment to it, and this process can sometimes take several months.
- Contact a licensed insolvency trustee to determine if bankruptcy or a proposal might be a good solution for you.
AUTHORS’ NOTE Thank you to Judith Hanebury, KC for providing excellent editorial assistance in preparing this article.
Looking for more information?
Looking for articles like this one to be delivered right to your inbox? SUBSCRIBE NOW!
DISCLAIMER The information in this article was correct at time of publishing. The law may have changed since then. The views expressed in this article are those of the author and do not necessarily reflect the views of LawNow or the Centre for Public Legal Education Alberta.
About Ebun Agharese
About Anna Lund
