This question was answered by the Washington Association of REALTORS Attorney,Annie Fitzsimmons. The Legal Hotline lawyer does not represent WashingtonAssociation of REALTORS® members or their clients and customers.

QUESTION:

When can a lender take a deficiency judgment against a seller and, conversely,when is a lender prohibited from taking a deficiency judgment?

ANSWER:

First, a deficiency judgment is a court ordered obligation on a borrower to repaymoney to the lender even though and even after the borrower’s lender foreclosedthe deed of trust on the real property. The amount of a deficiency judgment is thedifference between what the borrower owed the lender and the sale price of the realproperty at the foreclosure sale.In Washington state, there is only one way for a lender to take a deficiency judgment against a borrower whose repayment obligations are secured by a deed of trust on real property. The only way lender can take a deficiency judgment is forlender to judicially foreclose the deed of trust. Judicially foreclosing a deed of trustmeans that a lawsuit must be filed by the lender against the debtor. Before theproperty can be sold at the foreclosure sale, there must be pleadings filed in thecourt and hearings conducted. This is not a simple process where notice of theforeclosure sale is given and the property is sold 90 days later at a foreclosure sale.A judicial foreclosure is expensive, time consuming and fairly complicated. As apercentage, very few foreclosures in Washington state, on an annual basis, are judicial foreclosures. The far more common type of foreclosure is a non-judicial foreclosure. Rememberthat only judicial foreclosures can result in a deficiency judgment. Accordingly, thevast majority of foreclosures conducted in our state cannot result in a deficiency judgment against seller. Significantly, real property that is used for agriculturalpurposes must be foreclosed judicially. Agricultural property may not be foreclosednon-judicially. In a non-judicial foreclosure, lender must give notice to seller (andothers, such as junior lien holders and occupants of the property) that the loan is indefault and how the default can be cured. Thirty days after that notice is given,lender must give another notice setting the foreclosure sale for at least 90 dayslater. No other notices are required before the foreclosure sale can happen.In a non-judicial foreclosure, no deficiency judgment can be taken. However, if theproperty owner had a first position creditor and a second position creditor on title tothe property, and the first position creditor foreclosed its deed of trust, the secondposition creditor (and any other subsequent creditors) can still pursue debtor for thedebt owing to those junior creditors, even though debtor no longer owns theproperty that originally secured the junior debt. In other words, a non judicialforeclosure prevents the creditor whose deed of trust was foreclosed from seekingrepayment from debtor of any portion of the foreclosed debt, however, any otherdebt that was also secured by the property and unpaid as a result of the foreclosure