Sometimes when homes are foreclosed upon, there are surplus funds that result from the proceeding sheriff’s sale. This happens if the property ended up selling for more than the borrower owed on the mortgage at the time of the sale.
In cases such as these, the question that lingers is who is entitled to those surplus funds? In this situation those funds will go to the borrower, since it is essentially the equity that they have built in the home. When this happens, the borrower will be entitled to recoup the surplus funds even though their home has been taken away from them.
This doesn’t always happen though, as the borrower after the foreclosure has the obligation to take the necessary steps to recoup the surplus funds and there are some instances in which other parties may be entitledto the surplus funds that result from a foreclosure.
Below, we will dive into what happens in these situations, and how to claim surplus funds after a Michigan foreclosure.
Who is Due Surplus Funds from a Foreclosure?
If a property sells at sheriff’s sale for less than what was remaining on the mortgage, a delinquency occurs. This amount of money is essentially written off as a loss for the mortgage company that foreclosed on the property, although the mortgage company does have the right to pursue the borrower for the deficiency balance.
There are times, though, when the property will sell for more than what is left on the mortgage, which results in a surplus. How that surplus is handled depends on the order in which people have claims to the property.
Who Has First Claims to Foreclosure Proceeds?
When a property sells at sheriff’s sale during a foreclosure, the first entity to be paid will be the primary lienholder. In most cases, this is the mortgage company. Their debt must be satisfied first before it’s determined whether there are surplus funds.
Let’s look at two examples, both revolving around a property that sold at sheriff’s sale for $50,000.
In the first example, the outstanding mortgage remaining at the time of the sale – including fees incurred by the lender – was $85,000. In this case, there will be a deficiency of $35,000. The lender will take a loss in this situation.
In the second example, the outstanding mortgage was $35,000, which means there will be a surplus of $15,000.
These surplus funds will go to the borrower in most cases, unless there are other lienholders on the property. This might occur if another creditor has attached a lien to the property, which could happen if you took out a second mortgage or had a judgment lien from a delinquent credit card bill.
If this is the case, then those lienholders would be paid next before the borrower. Whatever money is left after the liens are satisfied goes to the borrower.
How Are Surplus Funds Handled?
In judicial foreclosures, surplus funds are handled in a very straightforward fashion. Since these foreclosures go through the court system, the judge issues an order that directs who the surplus funds are to be paid to.
This is what happens in cases such as a tax foreclosure, which is a different process than a traditional mortgage foreclosure by advertisement. In 2020, the Michigan Supreme Court ruled in Rafaeli, LLC v Oakland County that any government entity that forecloses on a property must return any surplus funds to whoever the title owner was when the foreclosure happens.
Later that year, the Michigan Legislature passed a law to amend the General Property Tax Act so that procedures would be in place for any property owner to claim their surplus funds if the property was foreclosed for tax reasons.
However, a majority of foreclosure cases in Michigan are non-judicial and conducted by means of foreclosure by advertisement. This means that the lender proceeds with the foreclosure without going through the court system, opting instead to schedule a sheriff’s sale with proper advertised notice, as laid out pursuant toMichigan law.
Even in these cases, though, an officer is assigned to handle the proceeds of a foreclosure sale, including any surplus funds. This means that even though a judge won’t be handing down the legal edict in the case, Michigan law allows for the borrower to recoup the surplus funds.
How Can You Claim Surplus Funds After a Michigan Foreclosure?
After the foreclosure proceedings have completed, don’t expect a check to be sent to you automatically if you are due surplus funds. There is action that you will have to take to ensure you get the money that is rightfully yours.
Some jurisdictions may require that you file an official petition with their circuit court. This petition would need to follow whatever rules and regulations the local jurisdiction sets for how to file, when to file and what information and proof needs to be included.
Other jurisdictions might allow you to simply file a written demand to whatever entity that is holding the sheriff’s sale to make your claim to the surplus funds. This is a very important step, as there are deadlines in place as set by Michigan law to when you need to file your claim in order to ensure you get your money.
One of the big benefits to claiming these surplus funds is that you could potentially use it to redeem your property rights and remain the homeowner even after the property has been auctioned off. That’s because Michigan foreclosure law provides in most cases a six-month redemption period following the sheriff’s sale, during which the borrower may redeem the property if they’re able to satisfy the entire outstanding balance owed.
Work with a Trusted and Experience Real Estate Law Firm
If your home is being foreclosed upon or if you are within your redemption period after the foreclosure then, you could have significant surplus funds that are due to you. While Michigan law now prohibits equity theft from taking place, borrowers must take action to ensure they recoup their surplus funds.
It’s not easy to do this on your own, though, as it requires filing legal paperwork and meeting specific deadlines. That’s why if you find yourself in this situation, you should work with the trusted and experienced attorneys at Babi Legal Group.
Our team of legal professionals has a combined 20 years of real estate experience, and can help you get the surplus funds that are rightfully yours. Contact us today to find out how we can serve you.