If someone dies when their home, residence or other mortgaged property is “under water”, what should the personal representative of the estate do? Should they continue to make the payments on the property to keep it current until it sells? What happens if the sales proceeds are not enough to cover the mortgage note? Should the estate be worried about a deficiency judgment? What is a deficiency judgment by the way?
Unfortunately, in today’s economy these issues appear to be coming up more frequently so I’ll cover them in this column.
Assume that Barry owns his home either in his name or in the name of his revocable living trust. He purchased the home a few years ago for $600,000, taking out a $500,000 mortgage on the purchase. The home has since depreciated in value to $420,000. Barry dies.
The personal representative of Barry’s estate sees that Barry’s trust has sufficient monies to continue servicing the mortgage debt for some time. It isn’t clear, however, whether the property will rebound in value quickly enough to make the continued payments worthwhile. The carrying cost of the property, including taxes and insurance will drain the trust over time.
The personal representative reviews several options. The first option is to continue making payments with the hope that the value of the property will rebound and that it would be sold for enough money to cover its outstanding debt and the accumulating carrying costs. The danger with this option is that the property’s value is unlikely to rebound rapidly enough so as to offset these amounts, and the estate is depleted keeping the note current.
The second option is to try and work out a short sale with the lending institution where the property is sold to a third party for whatever it can be sold for, and the lender would agree that the net proceeds would be full satisfaction of the outstanding debt. This might work if the lending institution is agreeable. The personal representative decides to keep this option open.
The third option is to let the home go into foreclosure. The danger here is that if the lender sues the estate the lending bank can get something called a “deficiency judgment”. A deficiency judgment is a judgment against Barry’s estate for the difference between what the lender is able to unload the home for after its foreclosure and the sum of the outstanding debt, accumulated interest, attorneys fees and costs of the transaction. In Barry’s case that may easily amount to more than $80,000.
You might wonder whether Barry’s revocable trust, which harbors all of his liquid assets, would be liable for a deficiency judgment against Barry’s estate. The answer to that question is “yes”, but there is an important qualification. That qualification is that the lender has properly filed a creditor’s claim against Barry’s estate.
Barry’s personal representative has an obligation to run a “creditors notice” period and to actually serve any reasonably ascertainable creditor with a “notice to creditors”. That notice provides that the creditor must file a claim against the estate within the creditor’s notice period (generally the later of ninety days from the date of a creditor’s notice publication in the newspaper or 30 days from the date of notice to that creditor). If the creditor fails to file a claim against the estate then the creditor is barred from recovering amounts against the estate or the decedent’s revocable trust.
Often banks are lackadaisical and don’t file within the prescribed time period. If they fail to so file a claim, the mortgage is still valid as to the property as collateral. In other words, the bank can still foreclose and recover the property.
However if the lender doesn’t file a claim within the prescribed time period, the lender loses the ability to obtain a deficiency judgment against the estate. Established case law in Florida from the 1930s tells us that the lender’s only recourse when the lender fails to file a timely claim is on the mortgaged property (and any other collateral) pledged under the terms of the note and mortgage.
So if the creditor does not file a timely claim, the personal representative may actually choose the third option available which is to allow the home to be foreclosed upon. The rest of the decedent’s assets are not subject to any deficiency judgment. By not making continuing payments on an underwater asset the personal representative actually preserves the remainder of the estate.
In the example that I describe I am assuming that there is no one else who has signed or otherwise guaranteed the mortgage and that there is no other collateral pledged under the terms of the note and mortgage. Further, if the lending bank has actually filed a valid claim within the prescribed time period then the lender may go after the other estate and trust assets for recovery under a deficiency judgment.
As always, one should consult with one’s own legal counsel on the application of the law to your own facts before acting.