Foreclosure Surplus Funds: What They Are & How To Claim Them

Many homeowners use mortgage loans to purchase their homes. If borrowers can’t make their loan payments as promised, the mortgage holder has the right to foreclose on the property, repossess the home, and sell it. If the mortgage holder receives more money from the sale than what the borrower owed on the property, the former property owner is entitled to receive these surplus funds.

What Is a Foreclosure?

Foreclosure is the legal process lenders use to take and sell a home when the homeowner doesn’t make their mortgage payments. This allows the lender to recover the money they loaned because mortgages are secured loans, meaning the house is used as collateral. If you fall behind on payments, the lender can sell your home, often through an auction, to get their money back. Keep in mind that foreclosure rules and procedures vary depending on the state where you live.

Foreclosures fall into three categories:

• Judicial foreclosure: This is the most common type of foreclosure in the United States. In a judicial foreclosure, the lender files a lawsuit against the homeowner. If the court rules in favor of the lender, it issues a judgment that allows the property to be sold, typically at a public auction.

• Strict foreclosure: This process is less common and only used in a few states. Here, the lender files a lawsuit, but instead of an auction, the property is transferred directly to the lender without a sale.

• Nonjudicial foreclosure: Some states allow lenders to foreclose without going through the courts. This is called nonjudicial foreclosure. Instead of filing a lawsuit, the lender follows a process outlined by state law and the terms of the mortgage loan agreement. This usually involves sending notices to the homeowner and observing specific waiting periods before selling the property.

What Happens To Your Home After Foreclosure?

After a foreclosure, most homes are sold at a public auction, often called a sheriff’s sale. At this auction, the lender (or mortgage holder) can place what’s known as a credit bid. A credit bid lets the lender bid on the property without using actual cash. Instead, the lender applies the amount owed on the mortgage toward the bid. This means they don’t have to pay out of pocket if no one else bids high enough to cover the loan balance. Credit bidding is a way for lenders to reclaim the property if the auction doesn’t attract enough outside bidders. Once the lender owns the home, they may sell it later through other channels, like a real estate agent.

If you’re facing foreclosure, it’s important to know that you might be able to stay in your home during the auction process. Some homeowners remain in the property until the foreclosure sale is completed or even afterward, depending on state laws.

In some states, you may also have a chance to reclaim your home after the auction through a legal option called the right of redemption. This gives you a limited window of time to buy back the property by paying the sale price, interest, and certain fees to the winning bidder. State laws also control how long you can stay in the home before being formally evicted, so it’s a good idea to check your state’s foreclosure timeline.

What Are Foreclosure Surplus Funds?

If your property is foreclosed and sells for less than you owe on the mortgage, the remaining balance is called a deficiency. In some states, lenders can sue you to recover this amount by getting a deficiency judgment from the court. This judgment legally requires you to pay the unpaid balance, and if you don’t, the lender may garnish your wages or levy your bank account, depending on state law.

On the other hand, if your foreclosed property sells for more than you owed on the mortgage, the extra money is called foreclosure surplus funds or simply a surplus. This is money you may be entitled to claim after the sale.

How To Claim Foreclosure Surplus Funds

The process for handling surplus funds depends on whether your foreclosure was nonjudicial or judicial.

• If it was nonjudicial, the lender appoints a foreclosure trustee to oversee the sale and manage any surplus funds.

• If it was judicial, the court assigns a foreclosure officer to handle these responsibilities.

Surplus funds may be held by the foreclosure trustee/officer or deposited with the court. As the former homeowner, you have the right to claim this money, but the process for doing so can vary.

In most cases, the trustee or court officer overseeing the sale is required to send a notice of the surplus funds to your last known address. This notice should include details about how to claim the funds. If you don’t receive this notice promptly, check your prior foreclosure notices for contact information and call the trustee or officer to ask about the surplus.

Be cautious, as foreclosure surplus fund scams do exist. If you receive suspicious communication or if someone offers to recover the funds for a fee, contact the trustee or court directly to verify the legitimacy of the claim.

Steps To Recover Surplus Funds

Surplus funds are calculated by subtracting the outstanding loan balance and foreclosure costs (such as legal fees and auction expenses) from the sale proceeds. If there are any junior liens — like a second mortgage or unpaid property taxes — those are paid next. Finally, if there’s any money left over, it’s distributed to you as the former homeowner.

To recover excess funds from a foreclosure sale, you’ll need to act quickly because there’s a limited window to make your claim. Read the surplus funds notice you received to learn exactly what steps you should take, but the process often includes:

• Providing proof of prior ownership: You’ll need to show that you were the legal owner of the foreclosed property.

• Completing a claim form: In some cases, you’ll need to fill out and submit a specific form to the trustee or court.

• Attending a court hearing: Depending on the situation, you may have to attend a hearing to prove your right to the surplus funds.

If you fail to claim the surplus funds within the required time frame, the court may treat the leftover money as unclaimed property. Recovering unclaimed surplus funds later can be much more difficult.

Remember, if you believe you’re entitled to surplus funds, it’s important to act quickly. There may be a deadline to claim the funds, and failing to do so in time could result in losing your right to recover them. Many people in this situation choose to seek professional guidance from an attorney to ensure they don’t miss out on what they’re owed.

How Do Liens Impact Foreclosure and Surplus Funds?

Whether you’re entitled to foreclosure surplus funds depends on who else has a claim against your home. Any claim on your property is typically recorded as a lien in the land records at your local county clerk’s office. The first recorded lien is usually your mortgage lender, and they have priority when it comes to being paid from the proceeds of a foreclosure sale. After the lender is paid and any special debts like unpaid property taxes are settled, the remaining funds are distributed to other claimants.

What Are Junior Liens?

If you have additional liens on your home — such as a second mortgage or a credit card judgment lien — these are called junior liens or subordinate liens. Junior lienholders only get paid after the primary mortgage lender and any higher-priority debts, like taxes, are paid. If there are still funds left after all lienholders are paid, you’ll then be entitled to those funds.

However, it’s important to understand that if there are junior lienholders, it’s unlikely you’ll receive any surplus money. This is because the foreclosure sale proceeds often aren’t enough to cover both the first mortgage and all junior liens. As a result, the surplus funds may be entirely used to pay off these debts before anything is left over for you.

If you’re unsure about how liens on your property might affect your ability to claim surplus funds, it may be helpful to contact the trustee or court handling the foreclosure. Additionally, consider consulting a professional, such as an attorney, to better understand your situation and options.

Foreclosure and Bankruptcy: How Can Filing Help?

Filing for bankruptcy can stop a foreclosure in its tracks — even if your property is scheduled for auction the very next day. This is thanks to the automatic stay, a powerful legal protection that kicks in the moment you file your bankruptcy case. The automatic stay pauses all collection activities, giving you some breathing room to explore your options. 

Chapter 7 and Chapter 13 bankruptcy both give you an automatic stay, but your home is handled differently in each type of bankruptcy.

How Chapter 7 Bankruptcy Affects Your Home

If you file Chapter 7 bankruptcy, the automatic stay will temporarily delay the foreclosure process. This can give you a few weeks to figure out your next steps, such as negotiating a mortgage modification or catching up on payments if that’s an option. However, Chapter 7 doesn’t provide a long-term solution for saving your home since it doesn’t allow you to spread out missed payments over time.

How Chapter 13 Bankruptcy Can Save Your Home

Chapter 13 bankruptcy is often a better option for homeowners who are behind on their mortgage and want to keep their house. This type of bankruptcy allows you to reorganize your debts into a repayment plan that lasts 3–5 years. Through this plan, you can catch up on missed mortgage payments while continuing to make your regular monthly payments moving forward. This can be a lifeline if you’re struggling to bring your loan current.

If you’re worried about losing your home and you’re considering bankruptcy, you need to act fast. It’s best to seek professional advice. Upsolve can help you get a free consultation with an experienced bankruptcy attorney near you.

Let’s Summarize...

When a mortgage holder sells real estate at a foreclosure auction, the selling price will determine whether the borrower gets any of the excess proceeds from the sale. If the borrower owes more than the sale price, in some states the bank can pursue the borrower in court for the deficiency. 

If the property sells for more than the borrower owes, that borrower could be entitled to the surplus funds. After the mortgage holder’s expenses and any subordinate lienholders are paid, the borrower can apply to either the foreclosure trustee or the court to receive the funds leftover from the sale. The borrower will likely need to complete a form, provide proof of prior ownership, and attend a hearing.