Recovering Your Equity: Claiming Excess Funds From a Foreclosure Sale
When a property is sold at a foreclosure sale for an amount exceeding the debt owed on the foreclosed loan, the lender must ensure that the surplus funds are disbursed to the individual or entity that is legally entitled to those funds. This is typically accomplished through the law firm that handled the foreclosure sale. The funds are held in escrow by the firm and claims may be made to the firm for disbursement of the funds.
According to Georgia law, where the holder of a senior encumbrance on realty forecloses on the property, the purchaser obtains title free and clear of inferior liens. See Hudson v. Dobson, 260 Ga. App. 473, 475 (2003). Though surplus funds, if any, from the foreclosure sale represent the equity of the foreclosed owner of the property, junior liens that were “wiped out” from the foreclosure sale attach to the surplus proceeds. See Roylston v. Bank of America, N.A., 290 Ga. App. 556, 563 (2008). This means that junior lienholders are first in line to receive the surplus funds ahead of the foreclosed owner in order of lien priority. For example, a second priority mortgage lender and then a third priority judgment lienholder are entitled to disbursement before the former owner receives any funds. The foreclosure firm typically obtains payoffs from the inferior lienholders and disburses in order of priority. As a result, the surplus funds may be exhausted by the disbursement to inferior lienholders leaving nothing for the foreclosed owner to claim. However, if there are no subordinate liens, the foreclosed owner is entitled to the entire amount of surplus funds.
If there are two or more claims to the excess proceeds and there is uncertainty as to which party is entitled to the funds, the foreclosure firm holding the funds may choose to file an equitable interpleader action pursuant to O.C.G.A. § 23-3-90, seeking a judicial determination as to which party is entitled to the funds. Typically, the foreclosure firm files the interpleader action as the Plaintiff and names all potential claimants as Defendants. Once served with the lawsuit, each defendant may file an answer asserting their claim to the funds. The Court then decides which party is entitled to the funds after a hearing and by entry of a final order. A Court may also award the foreclosure firm its reasonable attorney’s fees for having to file the interpleader action due to the multiple claims and uncertainty as to entitlement to the funds.
Ultimately, a lender and its law firm must ensure that surplus funds are disbursed to the correct party and in a timely manner otherwise both may be subject to a variety of claims such as conversion for failure to disburse funds upon demand by the rightful party. Most foreclosure firms have a department that handles surplus funds disbursement. For a foreclosed owner, knowing how to navigate this process to recover the equity from their foreclosed home may be a small way to achieve something positive from an unfortunate situation.
*This post is made available for educational purposes only as well as to give you general information and a general understanding of the law, not to provide legal advice. By using this blog, you understand that there is no attorney-client relationship between you and Weber Pierce, LLC.