Deficiency judgment
A deficiency judgment is a personal judgment against a borrower for the shortfall when a foreclosure sale raises less than the debt.
In Minnesota, for most homeowners, it does not exist — and a great many people lose sleep over a liability they do not have.
The rule#
Minn. Stat. 582.30 subdivision 2: a deficiency judgment is not allowed where a mortgage is foreclosed by advertisement under chapter 580 and carries a redemption period of six months under 580.23 subd. 1, or five weeks under 582.032.
Most Minnesota residential foreclosures are exactly that: chapter 580, six-month redemption.
For those borrowers, whatever the property sells for is full satisfaction of the mortgage debt. The sale ends it.
The lender cannot manoeuvre around it#
A lender might think to elect a twelve-month redemption period, putting the foreclosure outside the six-month category and preserving the deficiency claim.
The Minnesota Supreme Court closed that route in American National Bank v. Blaeser. Where the statute provides a six-month redemption period, a lender cannot foreclose by advertisement and preserve a deficiency by choosing twelve.
Where a deficiency remains possible#
Foreclosure by action under chapter 581. The bar in 582.30 subd. 2 applies to foreclosures by advertisement, and a judicial foreclosure is not caught by it. This is one of the main reasons a lender chooses the slower, costlier route.
Twelve-month redemption cases under 580.23 subd. 2, which fall outside the subdivision 1 category the bar describes.
Agricultural property, which has its own regime under subdivisions 3 and following — requiring an action within a stated period after the sale, a determination of fair market value, and a finding that the sale was conducted in a commercially reasonable manner.
Where a deficiency is available in the agricultural cases, it is capped at the difference between the property's fair market value and what remains unpaid — and the property may not be presumed to have sold for its fair market value, which lets a borrower put in evidence of what it was actually worth.
What is not covered#
The bar concerns the foreclosing mortgage.
A junior lienholder wiped out by the sale may still hold a claim on their own note, because the note is a separate obligation from the security. Whether that claim is pursued, and whether it is collectable, is a different question — and one worth putting to a lawyer rather than guessing at.
Why this matters beyond the money#
A homeowner who believes they will owe two hundred thousand dollars after losing their house behaves differently from one who knows the debt ends at the sale.
Fear of a deficiency drives people into bad decisions — signing over equity to a foreclosure rescue operation, draining retirement accounts, accepting terms they did not need to accept.
For most Minnesota homeowners the fear is unfounded, and finding that out early is worth a great deal.