New Tennessee Foreclosure Deficiency Judgment Statute Becomes Effective Soon

In addition to imposing new notice requirements on foreclosing creditors, the 2010 Tennessee Legislature has also passed House Bill 3057, which provides post-foreclosure protections to debtors regarding deficiency balances. This new law becomes effective September 1, 2010.

A “deficiency balance” is the amount of debt remaining after the foreclosure sale proceeds are applied to the creditor’s debt. Because most foreclosures don’t net sufficient proceeds to fully pay the debt, lenders often sue their borrowers to recover this difference.

This new statute allows a debtor to question whether the foreclosure sale price was truly representative of the “fair market value” of the property. Under this law, the debtor can attempt to prove “by a preponderance of the evidence that the property sold for an amount materially less than the fair market value…” If successful, the debtor may be able to increase the amount of credit he or she is entitled to.

Additionally, the statute potentially shortens the time to file a lawsuit to recover a deficiency balance, requiring that such actions be brought by the earlier of: two years after the foreclosure; or within the original statute of limitations for suit on the debt.

For most lenders, this new law should not have any practical impact. While you might imagine there would be various horror stories of lenders bidding $10,000 to buy a half-million property, in reality, most lenders were already calculating their foreclosure bids by starting at what the fair market value of the property is, and then subtracting sale expenses and carrying costs. The most prudent lenders have a standard procedure in place for all foreclosures, and many go the expense to order pre-foreclosure appraisals.

The key to avoiding issues under this law is to have some reasonable basis for determining “fair market value” when preparing foreclosure bids, whether it’s the tax records, recent sales, or new appraisals.

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12 thoughts on “New Tennessee Foreclosure Deficiency Judgment Statute Becomes Effective Soon

  1. If my house is worth $650,000.00 and I owe $400,000.00 and they bid and win at the court house steps to get it for $300,000.00 because of the economy and lack of bidders. Do they come after me for the $100,000.00 then or after they have turned around and sold it.I am in Tn and they told me that they will probably hold on to it until the spring or more. It is on the Water. Tim

  2. Does this apply to a property that had a foreclosure sale on March 10, 2010?

    • The new law went into effect in September 2010, and by my review, I believe that it would not apply to a sale in March 2010. Obviously, do your own research, but I don’t think so.

      • Thanks for the quick reply. Even though the date falls outside the effective date of the Statute, could a good case be built on the case law on which this statute was founded, namely, Lost Mountain Development Co. v. King decision, 2006 Tenn. Ct. App. LEXIS 810

  3. That’s the exact argument you’d make, which would ultimately connect you with the statute, indirectly.

  4. Pingback: Tennessee Court of Appeals Issues First Opinion Examining Text of Tennessee Deficiency Statute « Creditors Rights 101

  5. Pingback: Don’t Forget that Tenn. Code Ann. § 35-5-118(d) Also Has a Two Year Statute Limitations on Collection of Foreclosure Deficiency « Creditors Rights 101

  6. Pingback: New Opinion on Tennessee Post-Foreclosure Deficiency Statute Shows a Creditor-Friendly Trend in Interpreting Tenn. Code Ann. § 35-5-118 | Creditors Rights 101

  7. WHAT IS STATUTE OF LIMITATIONS FOR UCC DEFICINCEY FROM PRIVATE SALE IN A COMMERCIAL LOAN CONTEXT

  8. Pingback: Creditors Rights 101 | New Tennessee Opinion on Foreclosure Deficiency Follows Creditor-Friendly Precdent

  9. Fine way of explaining, and good piece of writing to get data on the topic of my presentation subject, which i am
    going to present in institution of higher education.

  10. Our business went through foreclosure. We owed $111,000. and the bank bought it on the courthouse steps for $87,000. They had gotten an appraisal (prior to foreclosure) for $140,000. I then found out they went back and got a second (lower) appraisal before the sale. We also had an appraisal done in 2012 that was for $140,000. I understand that they were supposed to bid something within reasonable market value. They now are seeking a deficiency judgement against us for $31,000. I am willing to pay a FAIR amount, but I believe that this should be lower.

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