When a borrower defaults on a secured loan in Florida, they can sometimes end up owing what is known as a deficiency balance.
A secured loan is a loan in which specific property is pledged as collateral for the loan as opposed to an unsecured loan which is only backed by the creditworthiness of the individual. Most people know secured loans as mortgage loans and car notes, but there are many transactions which have collateral pledged. I have written a separate blog article discussing secured vs. unsecured loans in Florida which you can find here if you want to know more specifics.
In a typical secured loan relationship, if payments aren't made as agreed, the lender may (generally at its option and leisure) take control of the collateral and sell it to satisfy the amount outstanding on the loan.
This process is known by different names and takes on different procedural processes depending on the type of property involved, the specific agreement of the parties, and the law governing the situation; For example:
- With respect to an automobile or other personal property, the process is generally a private repossession and sale of the collateral. This process is generally (but not always) done outside of the involvement and supervision of the court system in Florida.
- With respect to real property in Florida (real estate) the process is a mortgage foreclosure which does proceed through the court system in Florida. There are very specific, explicit requirements for mortgage foreclosures and deficiencies in Florida.
Many people are surprised to find out that even after their home, furniture, or vehicle has been repossessed (personal property) or foreclosed (real property/real estate) that they may be held liable for the amount due on the loan which is not covered by the sale proceeds of the collateral. I have found that many people are under the impression that once the collateral is repossessed or foreclosed, the obligation is satisfied and “the deal is done.” This is often not true.
This is where the concept of a deficiency comes into play.
A deficiency is the amount remaining unpaid on the loan after the collateral has been sold and the proceeds are applied to the unpaid balance. As discussed below, this calculation is subject to adjustment by various laws pertaining to deficiencies in Florida for both real and personal property.
Obviously, not every sale of collateral will result in a deficiency. In fact, some will result in a surplus, which means that there are excess funds above the remaining unpaid balance on the loan (including all fees and costs which are allowed under the agreement or applicable law). Surpluses are returned to the borrower after all costs and fees are paid and distributed. Surpluses are rare, however, because if the borrower has equity in the collateral (it's worth more than is owed) its almost always better to sell it directly than to wait for it to be sold by the lender.
There are some instances where a lender may not pursue a deficiency by law or by agreement. If it is by agreement (rare) then the loan is known as a “non-recourse loan” and the lender can not pursue the borrower for the deficiency. There are also some laws which prohibit a lender form pursuing a deficiency in certain circumstances, or which severely limit the pursuit of the deficiency by various means.
Because of the major differences in deficiency lawsuits in Florida, I will cover some points on the two major types, below:
Mortgage deficiencies in Florida:
- Can be sought against the borrower in either the original foreclosure proceeding OR as a separate lawsuit after the foreclosure proceedings have ended. §702.06 Fla. Stat. If brought as a separate lawsuit, they are generally brought by a purchaser / assignee. Dyck O-Neal is one of the largest purchasers of deficiency balances in the United States and regularly sues to obtain judgments against borrowers.
- If brought as a separate lawsuit, must be brought within one year after the day following the issuance of the certificate of title by the Clerk (or the day after the mortgagee accepts the deed in lieu of foreclosure) §95.11(5)(h) Fla. Stat. (This applies to foreclosure cases filed AFTER July 1, 2013)
- Cannot exceed the difference between the foreclosure judgment amount and the fair market value of the property on the date of the foreclosure sale. §702.06 Fla. Stat. The setting of the deficiency balance is within the sound discretion of the Court.
- Unless agreed otherwise in writing, can be sought in short sale transactions
- Some mortgage deficiencies are huge. Many are in the tens of thousands of dollars and there are many which are well into six-figure territory. Therefore, they can have devastating consequences for borrowers who are pursued as there can be no way to reasonably escape from under the massive debt burden except pursue bankruptcy.
Vehicle loan (and most other personal property) deficiencies in Florida:
- Can be sought against the borrower only if the deficiency is greater than $2,000.00. §516.31 Fla. Stat.
- Are not subject to a specific statute of limitations like mortgage foreclosure deficiencies
- Are more likely to be pursued than mortgage deficiencies because of the amounts involved are less likely to trigger a bankruptcy of the borrower.
- In MY opinion, provide more “gray” areas which an attorney can use to argue against in the deficiency lawsuit. Because the repossession and sale are held outside of the judicial process, all sorts of things can go wrong or be handled improperly.
A deficiency judgment is simply a deficiency balance which has been successfully sued upon in a deficiency lawsuit and has now been reduced to a civil judgment in Florida.
When the obligation is reduced to judgment, it is treated as any other civil money judgment in the state of Florida would be. This means that it is valid and effective for twenty (20) years and affords the judgment creditor all of the same post-judgment remedies that are available to any other type of judgment creditor in Florida including wage and bank garnishment, post judgment discovery in aid of execution and any other remedies available under Florida and federal law.
See my Judgment Defense practice page for more information on how I help consumers defend against civil judgments in Florida.
Again, this article is only a basic overview of deficiency balances, deficiency lawsuits and deficiency judgments in Florida. An exhaustive analysis of each and every element of every scenario is well beyond the scope of this article. In future articles, I will discuss and examine specifics of the mortgage deficiency and the many new statutes and cases in Florida which provide potential options for consumers facing deficiency lawsuits and judgments.
At the Law Office of Alex McClure, I pride myself on working closely with my clients to provide practical solutions to their consumer debt problems.
I do everything in my power to provide options that my clients didn't even know existed before consulting with me.
Contact the Law Office of Alex McClure today to find out how I can help you create a sustainable financial future for yourself.
The Law Office of Alex McClure provides services in Lake Mary, Sanford, Longwood, Deltona, Deland, Orlando and all of Seminole, Volusia, Orange, Brevard and Lake Counties.