What is a Deficiency Judgment?
A deficiency judgment is a legal order to pay off a remaining balance after foreclosure or repossession. When a lender takes your property and sells it, the sales proceeds are used to pay off your debt (and additional fees). If the property does not sell for enough to satisfy the debt, the amount you still owe is called the deficiency. A deficiency judgment from the courts makes you personally liable for the deficiency balance and allows lenders and debt collectors to come after you.
Deficiency Judgment Overview
When you default on a loan and the lender repossesses your property, the value of the property may not pay off the loan.
Example: you owe $200,000 on your home, but you cannot make the mortgage payments anymore. Your lender forecloses on the home, and the property sells for $180,000. You're $20,000 short of paying off the $200,000 loan, so you have a $20,000 deficiency.
A deficiency judgment would allow your lender to pursue you for the remaining $20,000. The lender might also be able to add on legal and foreclosure costs to the total bill.
What can Happen?
If your lender successfully wins a deficiency judgment against you, you are personally liable for the amount of the judgment: you’re legally obligated to pay your lender. If you don’t pay, your lender can try to collect using other methods.
In most cases, your lender won’t actually do anything. It’s likely that your account will be turned over to a collection firm, and the debt collector will pursue the debt.
Debt collectors may try several methods:
- Garnishing your wages – taking a portion of your paycheck until the debt is satisfied
- Levying your accounts – taking cash from your bank account to reduce the debt
- Putting liens on other property – taking a legal interest in items you own (although your home, car, and other essential items are often protected)
Retirement accounts are generally not at risk in a deficiency judgment, but you should check with a local attorney if you are at risk.
Is a Deficiency Judgment Likely?
If your lender is allowed to pursue a deficiency judgment, there is no way to know whether or not they will. In many cases, it’s not worth the trouble for lenders and collection agencies.
Legal action is expensive and time-consuming. Borrowers who just suffered a foreclosure or repossession often don't have assets or income available to pay off a deficiency balance. If you had the resources, you wouldn't have missed your payments in the first place.
In some cases, a deficiency judgment isn’t even an option. State laws dictate whether or not lenders can pursue deficiency judgments after foreclosure. If a loan is a non-recourse loan, a deficiency judgment is out of the question. For example, in some states, a loan used to purchase your primary residence is a non-recourse loan (but if you take a second mortgage, that loan might be a recourse loan). For more information on recourse loans and individual state laws, see How Recourse Loans & Non-Recourse Loans Work.
Facing a Deficiency Judgment?
If somebody is trying to collect on a deficiency, speak to a lawyer who is licensed in your state and familiar with debt collection.
This is a legal action, and you need legal help.
It may be possible to fight the collection efforts or limit how much can be collected, but you’ll need a skilled attorney to review your case. Bankruptcy might also be an option for wiping out old debts, but there will be side-effects (including potential damage to your credit).