What is a Foreclosure Surplus?
When a property gets foreclosed on, it gets sold at an auction to try and cover the unpaid debt attached to it.
Let’s say a property has a $250,000 mortgage on it. If it gets sold at a foreclosure sale for $300,000, then there is a surplus of $50,000.
That’s because the amount brought in by the foreclosure sale ($300,000) is more than the amount foreclosed on ($250,000).
This begs the question: who gets to keep the foreclosure surplus?
Technically, that surplus is the borrower’s to keep.
But it can be a lengthy process to recover the surplus.
Let’s discuss how to recover a foreclosure surplus in Texas.
Recovering Foreclosure Surpluses in Texas
The process for recovering a foreclosure surplus in Texas differs depending on the type of foreclosure it is.
On the one hand, there are tax foreclosures. This is where the county forecloses on the property due to delinquent taxes.
On the other, there are mortgage & other lien foreclosures. This is where a lender or other lien holder forecloses on the property due to lack of payment.
Both are subject to different rules and have different processes for recovering surpluses.
Tax Foreclosure Surplus Recovery in Texas
In Texas, tax foreclosure surplus recovery is subject to some pretty strict rules.
It’s outlined in detail in the Texas Property Tax Code.
After the sale, any excess funds are kept with the county where the property is located.
Typically, the former owner will be notified that there are surplus funds from the foreclosure sale (but now always!).
The former owner will have to petition the county to turn over the surplus funds.
If no one petitions to recover them, the surplus funds generally can be held by the county for two years before they are distributed to the taxing bodies that foreclosed on the property.
Some third party companies specialize in recovering foreclosure surpluses. That type of company will often ask the former owner to assign any rights to the surplus recovery to the company.
While it’s generally legal to assign the right to recover a tax foreclosure surplus to someone else, there are very strict limitations outlined in the Texas Property Tax Code.
Mortgage Foreclosure Surplus Recovery in Texas
Mortgage foreclosure surplus recovery in Texas is a little less formal.
Unlike for tax foreclosures, there isn’t a specific statute outlining the mortgage foreclosure surplus recovery process in Texas.
However, that does not mean that a borrower won’t be able to recover surplus funds after the foreclosure sale.
Generally, a borrower will have to submit a claim to the trustee administrator for their surplus funds. The administrator usually sends a notice about the available funds to the borrower sometime after the foreclosure sale asking if the borrower wants to make a claim.
The trustee administrator will verify the borrower claim to the surplus funds and should distribute them shortly thereafter.
Sometimes there will be other claims to the surplus funds. Often, this will be in the form of other lenders and lien holders that were subordinate to the first mortgage holder. These junior lien holders will typically have to get their liens cleared first before any surplus funds can get distributed to the borrower.
After all other liens are cleared, any remaining surplus should get distributed to the borrower.
And if the trustee administrator (or whoever is holding the funds) isn’t cooperating for some reason, then the next step would be to take legal action.
From there, a court would verify the claim to the surplus funds and enforce distribution.
Conclusion
Thankfully, it is possible to recover surplus funds after a foreclosure sale.
That said, the process to recover surplus funds can be a bit confusing.
As always, each individual situation can differ significantly.
That’s why it’s recommended to speak with an attorney with experience recovering foreclosure surpluses.
But, in many cases, a borrower can recover surplus funds, so much of the equity that he or she may have built in the property before the foreclosure won’t be lost.