Can a lender get a deficiency judgment after a New York foreclosure sale?

This page explains New York law, mainly section 1371 of the Real Property Actions and Proceedings Law (RPAPL). A deficiency judgment is the personal judgment for whatever the foreclosure sale did not cover, and it is often the largest number in the case for a borrower or a personal guarantor. KOR Law LLP's debtor and creditor practice handles deficiency claims for borrowers, guarantors and lenders.

What is a deficiency, in plain terms?

When a mortgaged property is sold at a foreclosure auction, the money goes first toward the debt. If the price is less than what is owed, the gap is the deficiency. The court system's CourtHelp guide gives a simple example: a $500,000 debt and a $450,000 sale leave a $50,000 deficiency. The lender cannot simply bill you for that gap. It has to ask the court, by motion, for leave to enter a deficiency judgment, and the court decides the amount.

The opposite can also happen. If the sale brings in more than the debt and the liens, the extra is surplus money, and a separate court process decides who receives it; see who gets the surplus money after a New York foreclosure sale.

How does a deficiency claim move through the court, step by step?

1. Judgment of foreclosure and sale. The court enters the judgment, which states the amount owed and directs a referee to sell the property. The earlier stages are laid out in what happens after you are served with a foreclosure summons in New York.
2. The auction. The referee sells the property at a public auction. Days, rooms and bidding rules for each borough are collected in where and when foreclosure auctions are held in New York City.
3. The deed. The referee delivers a deed to the buyer. That delivery is what the statute calls the consummation of the sale, and it starts the 90-day clock (RPAPL 1371(2)).
4. The motion. At the same time as it moves to confirm the sale, and within those 90 days, the party owed the remaining debt may move for leave to enter a deficiency judgment (RPAPL 1371(2)).
5. Notice. The motion goes to the person it targets, or to the attorney who appeared for that person in the action. It must be served personally or in another way the court directs (RPAPL 1371(2)).
6. Valuation. Whether or not the respondent appears, the court determines the fair and reasonable market value of the property as of the date it was bid in at auction, on affidavits or in whatever other way it directs, such as a hearing (RPAPL 1371(2)).
7. The order and the judgment. The court directs entry of a deficiency judgment for the amount the statute allows. From then on it is a money judgment the lender can enforce like any other.

How is the amount calculated?

The statute spells out the formula. It is not simply the debt minus the auction price.

The "higher of" rule is the protection that matters most. A lender that buys the property back at auction for a low bid does not get credit for only that bid; if the court finds the property was worth more, the larger market value is subtracted instead. CourtHelp's example shows the effect: on a $500,000 debt, a $450,000 sale and a $475,000 fair market value, the deficiency judgment can only be for $25,000. The figure that drives the result is therefore the court's finding of market value, which is why the appraisal deserves the attention described in how to challenge the appraisal behind a New York deficiency judgment.

Who can be held liable for a deficiency?

Only a person who is liable to the plaintiff for the payment of the mortgage debt, who was made a defendant in the foreclosure, and who either appeared or was personally served with the summons (RPAPL 1371(1)). Three groups are usually involved:

• The borrower who signed the note. The borrower is the usual person liable for the debt, and is normally named and served in the foreclosure.
• A personal guarantor named in the foreclosure. A guarantor who is liable for the debt can be made a defendant in the foreclosure, so the deficiency can be sought in the same action. The separate defenses a guarantor may have are covered in what defenses a personal guarantor has when a New York lender sues.
• An owner who is not on the loan. Every person with an ownership interest subordinate to the mortgage must be made a defendant (RPAPL 1311). Being a necessary defendant because of ownership is a different thing from being liable for the debt, which is what section 1371(1) requires.

Someone who was never personally served and never appeared cannot have a deficiency judgment entered under section 1371, even if the foreclosure itself went forward. CourtHelp lists that as one of the possible defenses to the motion.

What happens if the lender misses the 90 days?

The consequence is written into the statute: if no motion is made as prescribed, the sale proceeds, whatever the amount, are deemed full satisfaction of the mortgage debt, and no right to recover any deficiency exists in any action or proceeding (RPAPL 1371(3)). That is why the delivery date of the referee's deed is worth pinning down early: get a copy of the deed and the referee's report of sale, and remember that the clock runs from delivery of the deed, not from the auction date.

One exception applies even when no deficiency motion is made or the motion is denied. Money left in the hands of a receiver of rents appointed in the action, after the receiver's fees and expenses, and money held by a mortgagee in possession or an assignee of rents, is paid to the plaintiff up to the amount by which the judgment exceeds the sale price (RPAPL 1371(4)). For rental buildings that can be a real sum; how those receivers work is explained in whether a lender can take over a building's rents with a receiver.

How does the court decide fair market value?

The statute leaves the method to the court: it determines value "upon affidavit or otherwise as it shall direct," as of the date the property was bid in at auction, or the nearest earlier date on which there was any market value (RPAPL 1371(2)). In practice that means competing appraisals, and sometimes a hearing where the appraisers are examined. CourtHelp tells homeowners plainly that to argue the value was higher than the lender says, they must submit proof from an appraiser.

Courts in each county follow their own forms as well. In Brooklyn, for example, the Kings County Supreme Court's foreclosure rules require parties to use the court's form Deficiency Judgment order, and the court lists it among its sample foreclosure forms. The rest of that court's foreclosure rules are collected in what to expect at Kings County Supreme Court in a foreclosure case.

What changes the answer in your case?

• The date the deed was delivered. A motion made more than 90 days after delivery is too late, and the sale proceeds become full satisfaction (RPAPL 1371(2), (3)).
• How you were brought into the case. Personal service of the summons or an appearance is required before a deficiency can be entered against you (RPAPL 1371(1)).
• How the motion was served. The motion must be served personally or as the court directs (RPAPL 1371(2)); CourtHelp lists improper service of the motion as a defense.
• The market value evidence. The court subtracts the higher of market value or sale price, so a credible appraisal can cut the number sharply (RPAPL 1371(2)).
• Prior liens. Amounts owing on earlier liens are added to the calculation, so check which liens were actually prior and what was owed on them (RPAPL 1371(2)).
• Collateral that is not real property. A co-op apartment loan is secured by the cooperative interest, which Article 9 of the Uniform Commercial Code treats as collateral (UCC 9-611(f)). After a sale of that collateral, the obligor's liability for any deficiency comes from Article 9 (UCC 9-615(d)), not from section 1371.
• How the property was owned. Holding a home through an LLC can change which foreclosure protections apply and who is personally exposed; see the firm's article on the LLC trap on your home mortgage.

For example: the same sale, three different deficiencies

Common mistakes after a foreclosure sale

• Treating the auction as the end of the case. The deficiency motion comes after the sale, and it can be the most expensive part of the case for a guarantor.
• Assuming the auction price sets the debt. A low bid does not control if the court finds a higher market value (RPAPL 1371(2)).
• Opposing without an appraisal. Arguments about value need proof from an appraiser, which takes time to commission.
• Counting from the wrong date. The 90 days run from delivery of the deed, not from the auction.
• Ignoring the referee's numbers. The judgment amount feeds straight into the formula; problems with it are easier to raise earlier, as explained in what a referee's report is and how to challenge the amount owed.
• Forgetting the judgment that follows. Once entered, a deficiency judgment can be enforced against bank accounts, wages and other property.

What to do this week

1. Find the auction date, the sale price and the date the referee's deed was delivered.
2. Count 90 days from the deed delivery and note the date in writing.
3. Collect the judgment of foreclosure and sale, the referee's report and every paper you were served with, including how and when.
4. If a motion has been served, write down its return date and the appraisal it relies on.
5. Ask a licensed appraiser whether a retrospective valuation as of the auction date is possible.
6. Gather any guaranty you signed and any later amendments, then speak with a lawyer before the return date.

Frequently asked questions

Is a deficiency judgment automatic after a foreclosure sale?

No. The party owed the remaining debt must make a motion within 90 days after the deed is delivered, and the court must determine the market value before ordering entry (RPAPL 1371(2)). Without a timely motion, the sale proceeds are full satisfaction.

Can I oppose the motion if I did not answer the foreclosure?

Yes. The court decides value whether or not the respondent appears (RPAPL 1371(2)), and you can serve and file opposition papers. CourtHelp lists possible defenses: a motion made more than 90 days after the deed was delivered, no personal service of the summons and no appearance in the action, the wrong method of serving the motion, and a dispute over the market value, which needs proof from an appraiser.

How long can a lender collect on a deficiency judgment?

Once entered, it is a money judgment. CourtHelp notes that a creditor can garnish wages and levy bank accounts for 20 years. The interest it adds and how long it binds real property are explained in how long a New York judgment lasts.

Does the deficiency rule apply to commercial properties?

Yes. Section 1371 applies to mortgage foreclosures generally, residential or commercial. Many other protections do differ by property type, as set out in commercial or residential foreclosure: which protections apply to you.

What if the property is sold for more than the debt?

Then there is no deficiency. The referee pays the surplus into court within five days (RPAPL 1354(4)), and the court determines who has a lien on it and in what priority before ordering distribution (RPAPL 1361(2)).

Can a deficiency judgment be appealed?

The appeal and reargument time limits are short. Where a judgment directs the sale of mortgaged property and payment of any deficiency, an undertaking to stay enforcement on appeal must also provide for payment of that deficiency (CPLR 5519(a)(6)). The steps are in whether you can appeal or reargue a foreclosure judgment.