Is Minnesota a Recourse State?

When a homeowner is worried that they might lose their house to foreclosure, they are usually also worried about whether their state is a “recourse” or “non-recourse” state. In a non-recourse state, if the funds from the sale of the mortgaged property (the house) are ¬†not enough to cover the outstanding debt (the amount the homeowner owes on the mortgage), the mortgage-holder may not have recourse against the borrower (through a deficiency judgment) after foreclosure. In a recourse state, the homeowner remains responsible for any remaining debt through a deficiency judgment.

Minnesota is generally considered to be a “non-recourse” state, although in certain situations mortgage-holders (or other creditors) may seek a deficiency judgment. Generally, if a foreclosure sale of a home is done by advertisement in Minnesota, no deficiency judgment is allowed. If, however, the homeowner has more than one mortgage on that property (a second mortgage, for example), then that mortgage-holder¬†may sue for a deficiency judgment. In Minnesota, most foreclosure sales are done by advertisement.

Minnesota permits deficiency judgments in cases of a foreclosure by action. A foreclosure by action occurs when a lender forecloses on a property in court. This is a rare occurrence in Minnesota, but if your house is foreclosed on in this manner, it’s important to know that a deficiency judgment is permitted.

This is pretty confusing, right?

Luckily, there are some great resources available online that do a good job of explaining this in easy-to-understand language.

The blog entry “Sued – After a Foreclosure” on the Minnesota Home Ownership Center’s blog does a great job of explaining the operation of the Minnesota deficiency statute and Minnesota’s status as a “non-recourse” state.

The fact sheet “Understanding Deficiency Judgments” by the Minnesota Home Ownership Center, Volunteer Lawyers Network, and the Housing Preservation Project does an excellent job of explaining deficiency judgments in Minnesota.

NOTE: If you have a question for me, I do not check my blog comments on a regular basis (only about once per month). For a faster reply, please email me. My email address is liz@chermacklaw.com

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18 Responses to Is Minnesota a Recourse State?

  1. Ellen says:

    I foreclosed on my home. I had two mortgages. The first mortgage was forgiven in the foreclosure. I just received a call from the bank of the second mortgage. (both mortgages were established at the same time. I am unsure why there were two in the first place. the second mortgage holder is trying to settle with me at a lower price due. I dont have the money. in minnesota can they come after me? I thought that this was a non recourse state? please educate me. thank you

  2. Elizabeth Rosar Chermack says:

    Ellen,

    I am sorry to hear that your house was foreclosed on.

    In the second paragraph of the above post, I wrote:

    Generally, if a foreclosure sale of a home is done by advertisement in Minnesota, no deficiency judgment is allowed. If, however, the homeowner has more than one mortgage on that property (a second mortgage, for example), then that mortgage-holder may sue for a deficiency judgment.

    I hate to be the bearer of bad news, but the second mortgage CAN come after you in Minnesota.

  3. Anon says:

    Does this non-recourse rule still apply if the property is a rental? I bought it as my primary residence and later turned it into a rental, but have trouble renting it. I have two loans at the same bank. If it forclosed, would they forgive the first and come after me for the second with this non-recourse rule? Or could they come after me for ALL deficiency because it is not my primary residence?

  4. Sam says:

    We are in the process of going through a foreclosure on our home. Also, we filed Bankruptcy, Chapter 7, back in June. We have a first mortgage and a second mortgage. Our second mortgage filed a Judgment against us on Oct 5th. Will they be able to collect anything from us given our situation? I guess I want to know how this will play out…….

    Thank you!

  5. Elizabeth Rosar Chermack says:

    Sam,

    You should contact your bankruptcy attorney ASAP about this. They will tell you what to do next.

  6. Gus says:

    My wife and I recently had an appraisal on our home in an attempt to refinance
    and the value of the home is about 65k less than what we owe on the mortgage.
    We both work and I don’t see a reason to declare bankruptcy, but we’re thinking of “walking away” from the loan and the house. Would we be sued for the difference
    between the mortgage owed and the appraisal value? Also, a broker I spoke with said that if we did that or did a “short sale” the bank would send us a 1099 form and we’d have to pay taxes on that amount.
    Appreciate any insight you may have.
    Thanks

  7. Elizabeth Rosar Chermack says:

    Gus, I sent you an email in response to your comment.

  8. Janice says:

    My husband and I went through a short sale in April 2009. All papers were signed and nowhere was it stated that we owed any money to the lender. The only thing we had to pay was $1000. Can’t remember the exact details right now withought looking it up. Everything was fine and dandy until we received a letter of collections from our lender almost a year later stating that we owed them $24,000. We spoke with them that we did not own the house any longer and that they apporved the short sale with no money owed after. Checked our credit report and everything on there shows that all accounts through the lender are closed and nothing is owed. Now we are starting to get calls from collection agencies from other states trying to get us to pay the $24,000.
    Have any advice for us???
    Best regards,
    Janice

  9. Elizabeth Rosar Chermack says:

    Janice,

    Did you have an attorney review the papers that you signed? Do you still have a copy of the papers that you signed?

    I am sending you an email.

  10. Carole says:

    I have been out of work for months and am three payments behind on my house and my car. I have two mortgages. The first mortgage is not upside down. In fact, there is some equity – about $5,000. The second mortgage was made for home improvements on the house, which increases its value. There are new windows, central air, electrical, landscaping, privacy fence, etc. I am worried that the first mortgagor will pocket all the value that I put into the house with the second mortgage, leaving me to repay the second mortgage through a default judgment.

    I am unable to stay and fight this out with the banks – I don’t have money for utilities, or car payments, or even food. I just want to sell my things and move in with a friend in another state – not forward my mail.

  11. Greg says:

    Hi. We are currently owe more than our house is worth, like a lot of people. We are 4 years into an ARM, and at the end of the 5th years, the payments go up to an unaffordable amount. We knew this when we refinanced 4 years ago, but planned to sell before then, and then the bubble burst. Familiar story? Anyway, I contacted our lender, US Bank to see if they would be willing to refinance, or change the interest rate amount or at least get rid of the floor clause, but they would not do anything to help. So, I have continued to make payments, but we are now planning on walking away. We actually have had an offer accepted on a much cheaper house, using a cash offer from money borrowed from relatives. So, what is the probability that the bank would come after us for a deficiency? Does having another residence hurt us in that regard? Also, I am also curious about an above question regarding the 1099 and owing taxes on the difference of what was owed on the house vs. what it sells for at the sheriff’s sale? Lastly, how likely is a bank willing to go for a Deed in Lieu of Foreclosure?
    Thanks!

  12. Pingback: Minnesota Bankruptcy and Housing Blog by Elizabeth Rosar Chermack, Attorney at Law » Blog Archive » More than 500,000 HAMP modifications have been made permanent

  13. Elizabeth Rosar Chermack says:

    Greg, I will send you an email.

  14. Kim says:

    We have a home that has a first and second mortgage. We currently have renters in the property that are very good and we have no plans to sell the house at this time. Here is our dilema: The second mortgage has come due and we cant accept the new terms they are offering as we have no equity in the house (the first is covered by the value of the home, but the second has none) and no extra cash to make the new payments they would require. If we continue to make the first mortgage payments, can the second mortgage holder obtain a deficiency judgement if the house is not in foreclosure? How would something like that work?

  15. Ann says:

    I have one mortgage on a co-op unit, owe more than it’s worth, and am considering walking away due to that fact but mostly because a very large assessment is quite possible for building improvements. I’m gainfully employed and current on my mortgage and association dues. How do I know if my lender can initiate a foreclosure by action to allow it to seek a deficiency judgment? Also, can the association seek a judgment for loss of any dues before property sells again? Thank you in advance for your thoughts.

  16. Khan says:

    I have a secon home with two mortgages..First throug Wells Fargo and Second throuch Wings Fin (CCFCU). Well’d modified first and we are making payments and the property is vacant. We are 9 months behind and not making any payments on second and they are sueing us in Anoka county court. Can they do that and how do I respond to this law suit..can they can this without forecloseing on the house?
    Please help or point to where I CAN GET HELP.

  17. Cally says:

    Dear Elizabeth,

    We own a condo in a fourplex. We bought it last April. By June, I realized that my constant illness was due to mold in the basement. When I had moved in to the building, I did not see the black stuff in our storage unit in the basement, as I just threw a few things in and never really turned on the light. But there it was: mold. Tons of it. And in ALL the storage units, which are located on the external walls. It turns out, the landscaping is really negative and the foundation has cracks. Our inspector inspected during the winter, but even in winter you can see how negative the slope is because of the sidewalk. My husband and I didn’t know what the signs were, but our ASHI-certified inspector surely should have. I have been sick constantly since moving in. I’m better when I am away and then return to sick when I am back. We cannot afford the $25,000+ to sue, though we know that the inspector and agents failed (nothing was disclosed). The value of our condo has been demolished from $130,000 to $40,000. I need to get my health back and the only way I can see to do it is to walk away. I cannot force the HOA to fix the water issues and they have been very, very lax about the landscaping and about multiple other water leak issues.

    My question is, if my husband makes almost 6 figures (just under), but I don’t make money (I am sick all the time) and 1) we have only about $10K in savings 2) we have one car, paid off and 3) we have about $1000 in cash each month after necessities will the back be likely to foreclose via a judicial action if we move out? The mitigating factor is that after we moved in, some paint starting peeling (back paint job by the sellers) and before I realized how sick the building was, I started peeling it back, thinking I would have the living room re-painted. Now there are sheets of paint peeled off. Should I fix that so the bank doesn’t sue me?

    Thank you,
    Cally

  18. J says:

    Post foreclosure, what should be the best course of action with regards to the junior lien holder. The last payment was 3 years ago yet the loan was never charged off or sold to a collection agency; it continues to report as a current outstanding debt on my credit report. As of yet, there has not been any threat of legal action. How likely is the bank to sue for deficiency at some future date? Is there a dollar amount threshold where a suit is more likely to occur? What is a good negotiated amount (percentage) to try and settle for in the event the bank does sue?

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