Deficiency Judgments After Foreclosure in Kentucky: Can They Come After You?
When a home is sold at a foreclosure sale in Kentucky for less than the amount owed on the mortgage, the difference is called a deficiency. The question many homeowners face after losing their property is: can the lender come after me for that remaining balance? In Kentucky, the answer is generally yes — but the process has important limitations and defenses.
What Is a Deficiency Judgment?
A deficiency judgment is a court order requiring the borrower to pay the difference between the outstanding mortgage balance and the amount the property sold for at the foreclosure sale. If you owed $200,000 on your mortgage and the property sold at foreclosure for $150,000, the deficiency is $50,000 — and the lender can seek a judgment against you for that amount.
Kentucky Allows Deficiency Judgments
Unlike some states that prohibit or restrict deficiency judgments, Kentucky permits them. After a judicial foreclosure sale (Kentucky does not permit non-judicial foreclosure — all foreclosures must go through the courts), the lender can petition the court for a deficiency judgment under KRS 426.005. The court has discretion in granting the deficiency and determining its amount.
Fair Value Limitations
Kentucky law provides an important protection for borrowers. Under KRS 426.005, the deficiency is calculated based on the fair value of the property at the time of the sale — not necessarily the sale price. If the property’s fair market value exceeds the foreclosure sale price (which is common, since foreclosure sales often produce below-market prices), the court may use the higher fair value to calculate the deficiency, resulting in a smaller — or potentially zero — deficiency.
This fair value protection is significant. Foreclosure sales are often poorly attended, and properties frequently sell for well below market value. Without the fair value limitation, a lender could buy the property cheaply at the foreclosure sale and then pursue the borrower for an inflated deficiency.
The Deficiency Judgment Process
The lender must petition the court for a deficiency judgment — it is not automatic. The court will hold a hearing at which the borrower can contest the amount of the deficiency, present evidence of the property’s fair value, and raise any other defenses. The borrower has the right to obtain their own appraisal of the property’s fair value and present it to the court.
Collecting on the Deficiency
Once a deficiency judgment is entered, it becomes a general judgment like any other money judgment. The lender can pursue collection through wage garnishment, bank account garnishment, judgment liens on other property, and debtor’s examinations. However, the borrower’s exempt property — including the homestead exemption and personal property exemptions under KRS Chapter 427 — is protected from collection.
Statute of Limitations
A deficiency judgment in Kentucky is enforceable for 15 years under KRS 413.090, the same as any other judgment. The lender does not have to collect immediately — they can wait years before pursuing collection, and the judgment accrues interest in the meantime. However, the lender must seek the deficiency judgment within a reasonable time after the foreclosure sale.
Defenses to Deficiency Judgments
Borrowers have several potential defenses. The property’s fair value may equal or exceed the mortgage balance, eliminating the deficiency. The lender may have failed to conduct the foreclosure sale properly, affecting the sale price. The lender may have failed to make reasonable efforts to market the property or obtain a fair price. The lender may have committed fraud or engaged in unfair lending practices. And in some cases, the mortgage terms themselves may limit the lender’s right to a deficiency.
Tax Implications
There is another consequence of a deficiency that borrowers should be aware of: if the lender forgives (cancels) the deficiency rather than pursuing a judgment, the forgiven amount may be treated as taxable income to the borrower under the Internal Revenue Code. The lender will typically issue a 1099-C (Cancellation of Debt) form for the forgiven amount. There are exceptions — including the insolvency exception and, in some cases, the qualified principal residence indebtedness exclusion — but borrowers should consult a tax professional to understand the implications.
Alternatives to Deficiency Judgments
If you are facing foreclosure and are concerned about a potential deficiency judgment, there may be alternatives worth exploring. A short sale — selling the property for less than the mortgage balance with the lender’s consent — may allow you to negotiate a waiver of the deficiency as part of the deal. A deed in lieu of foreclosure, where you voluntarily transfer the property to the lender, may also include a deficiency waiver. In some cases, bankruptcy can discharge deficiency liability.
If you are facing foreclosure or a deficiency judgment in Kentucky, Buckles Law Office can help you understand your options. Call (859) 225-9540.
