DEFICIENCY: Nevada, unlike California, is a deficiency state. Meaning even AFTER the bank forecloses the bank can still go after the remaining debt against a seller. Do not confuse this with a 2nd lienholders right to sue when they have been rendered a “sold-out junior lienholder” as described in the FORECLOSURE / ONE ACTION blog.
A home owner borrower in Nevada, even if the home owner is foreclosed upon can be liable for the remaining debt after foreclosure. But it’s rare and tricky. Here’s how it works. Skipping over how foreclosure works, the 120 days, etc. lets imagine a scenario where the foreclosure is just about to occur wherein there is an auction.
Let’s imagine a fake factual scenario:
- The home was purchased in 2005 for $500,000.
- The current debt on the home is $400,000 (including all late fees, attorney fees etc.)
- The current value of the home is $390,000.
At the foreclosure ‘auction,’ if the home sells to a bidder at a price in excess of $400,000, the debtor (the foreclosed upon home owner) owes nothing more to that foreclosing bank. If at the foreclosure ’ the bank sells the home at a price not adequate to cover what remained due on the loan, say for example for $300,000, then the lender may file what is called a “deficiency law suit,” per NRS 40.451 (See [i] Below) This case must be filed within six (6) months of the foreclosure sale. The amount of ‘deficiency’ to be paid is determined on the following formula: An appraiser is appointed to find the market value.
The debtor receives a credit of the market value or the foreclosure sale price whichever is greater. So in our example there is $100,000 of debt still owed because the auction sales price was only $300,000. The difference between $400,000 and $300,000 is $100,000. However, we must look at the ‘market value.’ We are imagining that the market value is $390,000. So the home owner gets a credit of $390,000 even though the bank only received $300,000 at the action. Therefore the ‘deficiency’ would be $10,000 or $400,000 (the amount owed) minus the credit of market value of $390,000 is $10,000. Bankruptcy (See [ii] Below) complicates all law suits and foreclosures and in some instances eliminates debt.
Want to read more? Here’s a 2005 Nevada Supreme Court Case on one action and foreclosures. (See [iii] Below)
[i] http://www.leg.state.nv.us/NRS/NRS-040.html#NRS040Sec251
[ii] Due to the complexity of bankruptcy law, and the difficulty of determining which form of bankruptcy will apply to any given situation, most people will benefit from consulting with a qualified bankruptcy lawyer before filing for bankruptcy. The Prudential, Americana Group, REALTORS® legal department has a list of recommended bankruptcy attorneys at this Referral List.
[iii] http://caselaw.lp.findlaw.com/scripts/getcase.pl?court=nv&vol=121NevAdvOpNo79&invol=2
(Note: If you do not have a FindLaw account, you may create a free account after clicking on the link above. It will then direct you to the case cited here.)
See also the April 2008 MLS Terms of Use Memo from the Greater Las Vegas Association of REALTORS
May 1, 2007 at 11:40 am
On Friday April 20th you wrote that “Nevada is a One Action state” the article went on to explain “the bank can take the property by foreclosure or sue for the debt”.
The blog dated 4/27/07 states that Nevada is a deficiency state……After the bank forecloses they can still go back after the remaining debt.
I’m confused and would appreciate a little more clarification on this foreclosure issue.
May 22, 2007 at 9:25 pm
Great question! This one can get very complicated in a hurry. The Nevada Supreme Court has had to hear and rule on a number of cases where these issues have arisen.
It is possible, but not common for the 1st lien holder to sue following a foreclosure; it can be difficult and even impractical. However, keep in mind that a 2nd or 3rd lien holder may still have to sue in the event that the 1st lien holder executed a foreclosure which left them deficient.
Part of the Nevada Supreme Court Conclusion in the “McDonald vs. D.P. Alexander” case states; “The one-action rule and its exceptions are intended to protect debtors by preventing creditors from realizing more than the face value of a debt, not to deny a creditor recovery of a legal debt altogether.”
What’s really important to know is that these situations are generally complicated and can be very messy. That is why we always strongly urge clients to seek legal counsel in such instances.
June 7, 2007 at 2:46 pm
Could you please tell me more about 2nd lienholder. Can they sue for the full amount borrower Owes?
June 7, 2007 at 5:00 pm
I just wanted to add t my question. Both 1st and 2nd are the same bank.
Thank you
June 9, 2007 at 5:56 pm
Once the first lienholder has successfully completed foreclosure, then the second, third, etc. may sue by filing a deficiency judgement. It doesn’t matter if they are the same or different bank or mortgage company.
September 12, 2007 at 4:16 pm
After the 1st completes a foreclosure, and then sues for a deficiency on the 1st TD, what is the basis for any federal tax consequence?
September 13, 2007 at 5:42 pm
The federal tax liability comes from not repaying all monies one borrows.
March 9, 2008 at 3:22 pm
The foreclosed property is in North Las Vegas, NV. There was a second mortgage on this foreclosed property. Can the second mortgage company file for a deficiency judgement against the borrower even if the the borrower lives in California, which is a non-deficiency state? HOw is this going to work?
April 25, 2008 at 9:18 am
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January 28, 2009 at 9:06 am
In the state of Nevada. In today’s current economic situation. What percentage of foreclosures that the bank are suing for a deficiency judgement.
April 4, 2009 at 1:23 pm
Darren, In the past the federal tax liability from an upaid debt (of any kind) arises when the creditor abandonds its claim to the debt (”forgives the debt’). The value of the forgiven debt then becomes taxable to the debtor.
The tax liability does not come from the fact that one has not repaid the debt. As long as the creditor keeps a lien on file or has it at a collection agency or simply wants to recover there is no tax liability to the borrower/debtor.
Even if the debt is foregiven the tax liability can be avoided by extinguishing the debt by having in discharged in bankruptcy.
June 23, 2009 at 8:06 pm
What if a property is foreclosed on by the 1st lienholder, has an instant auction that covers all debt ($405,000 which covers loan, attorney’s fees, etc.), and then sells the home for a profit (home sold in 3 months for $495,000). BUT, the 2nd lienholder is paid nothing and is now suing the homeowner (who received none of the profit from the bank’s resell of the home) for the entire amount. In your situation above, the bank had to recognize fair market value for the home when their other division purchased it at auction. Given that the home sold in a very depressed housing marking for 25% more than the bank paid, isn’t it safe to say that whatever they assessed the fair market value to be was understated?
July 2, 2009 at 1:59 pm
Second Lien holder is allowed to sue the home owner in this scenario. The foreclosure of the first caused the second lien holder to be a ’sold off junior’ with all the rights to sue the homeowner, no liimitation.