Deficiency actions to recover balances owed after a consumer foreclosure action are not favored in New Jersey Courts. Although, such actions are permitted under New Jersey law, it is in very limited circumstances and may be difficult to obtain. Under New Jersey law, a judgment for deficiency may not be brought in the same action to foreclosure the residential mortgage (a separate action must be brought); this preclusion also includes claims on any personal guarantees. Foreclosure deficiency actions can be brought only once the mortgage is foreclosed; must be brought within three (3) months from the date of the sale and can not be brought against any party who was not a party to the foreclosure action. The deficiency balance sought must be the difference between the foreclosure judgment amount and the fair market value of the property at the time of the sale.
The public policy behind the legislation was to protect the homeowners from losing their homes and then to have a judgment against them for a deficiency which could be as much as the full amount of the mortgage plus additional costs and attorney’s fees.
The protection afforded by New Jersey’s deficiency statutes does not extend to business or commercial loans, one to four family residential dwellings owner occupied at the time the deficiency action is commenced where the mortgage is not the primary security for the debt or where there is a second mortgage lender and the mortgage is subject to a prior lien(s) not held by the same lender. It is a common misconception that these statutes protect all residential homeowners. For example the protection would not apply to a second mortgage held by a different lender than the one who holds the first mortgage, provided the first mortgage has already completed its sale; a single family dwelling where the owner or family does not occupy the property or a single family dwelling which secures a commercial loan.
Although, the amount of the foreclosure judgment is binding on all parties to the foreclosure action, the defendant in the deficiency action may still dispute the amount of the debt in the deficiency action. The main thrust of the statute’s protection is found in the ability of the mortgagors to dispute the amount of the fair market value of the property at the time of the foreclosure sale.
A deficiency action can not be brought if a deed in lieu of foreclosure is accepted. It must be remembered that an action to recover a deficiency balance will open the foreclosure and sale of the subject property and extend the homeowners right or his assignee to redeem the property for six months, by paying the full amount determined in the foreclosure action.
