RECENT AMENDMENT MAKE DEFICIENCY JUDGMENTS
 IN PENNSYLVANIA MORE "LENDER FRIENDLY"

By: Michael T. McKeever

              A deficiency judgment is possible when the debt owed to a foreclosing lender exceeds the value of the Property as of the date of the Sheriff's Sale.

            Establishing the amount of a Deficiency Judgment in the State of Pennsylvania has never been easy due, in large part, to a series of court decisions which had set up a number of procedural and substantive roadblocks making the process difficult, time consuming and expensive. 

            Recent amendments have streamlined the process of establishing the amount of a Deficiency Judgment and removed the difficult requirement of obtaining a judgment on the Note (in personam judgment) prior to a Sheriff's Sale of the Property.  A little history may be helpful.

            Previously, a creditor seeking a deficiency was required to file an in personam Action on the Note, obtain a judgment in that action, execute upon that judgment and conduct a  Sheriff Sale of the property.  Thereafter, in that same Action on the Note, a lender would petition the court to establish the amount of the deficiency.   The lender would then use this judgment to collect the balance of the debt owed following a Sheriff's Sale by attaching bank accounts of the borrower or selling personal property or other remedies.

            There were a number of reasons for which we advised clients not to bring an Action on the Note action and proceed to Sheriff Sale.  In an in personam action on the Note, a defendant presents numerous defenses which are not available in an Action of Mortgage Foreclosure.  These defenses would have substantially delayed the action.

            For instance, under Pennsylvania law, in an Action on a Note, a Borrower may assert counterclaims for Truth-In-Lending violations, setoff, recoupment, lender liability, accord and satisfaction and other similar defenses.  While these same defenses may be raised in an Action of Mortgage Foreclosure, those defenses are not generally valid defenses in an in rem foreclosure action.  Further, if the Defendants filed a Chapter 7 Bankruptcy and received a discharge of personal liability, then the Lender could not continue with the Action and instead would have to file an Action in Mortgage Foreclosure.

            The recent amendments now allow that the petition to establish deficiency (formerly know as a Petition to Fix Fair Market Value) may be filed in the Action of Mortgage Foreclosure.  The Petition, as before, must be filed within six (6) months of the date of the Sheriff's Deed and must set forth a statement of debt and a Fair Market Value.

            The amount bid at a Sheriff's Sale is not , by itself, determinative of the value of the property.  Rather, the law requires that the lender have the property appraised as of the date of the Sheriff's Sale.

            Once the Order establishing the deficiency is granted, the lender must file an Action on the Note and obtain a judgment in that action.  Once the Lender obtains a judgment in the Action on the Note, the Lender can execute upon the judgment to collect the amount due.  The judgment in that Action could be delayed if the borrowers raise the above noted defenses.  However, the fact that a judgment has been already granted in the Action of Mortgage Foreclosure, generally precludes the court from doing anything but entering judgment in favor of the Lender.

            The deficiency action should only be pursued, however, where there is a substantial loss to the Lender.  The Lender, prior to the pursuit of a deficiency, is well advised to perform an extensive asset search of the former borrower.  If there is a previous bankruptcy discharge of personal liability, then the deficiency judgment cannot be pursued.  Care must also be taken in considering whether certain assets of a former borrower are subject to attachment once the deficiency judgment is obtained.  Assets such as pension benefits, 401K plans and jointly held assets, where there are individual borrowers involved, are all types of assets that may not be subject to immediate attachment by a judgment creditor.

            The attorney's fees and costs for a routine, uncontested Deficiency Action (filing the Complaint, Petition to Fix Value and obtaining judgment by default) generally do not exceed $1,500.00.  Attorneys fees and costs for executing upon any deficiency judgment and collecting the money due to the Lender are additional and are usually based upon a percentage of the amount collected.

            Due to the recent changes in the Deficiency Judgment Act we have begun to recommend the pursuit of deficiency judgments in Pennsylvania in certain circumstances.

            The single most important recommendation is for the Lender to focus on the possibility of recovery of assets, without recovery, these judgments are not worth the time and effort of the Lender.