Deficiency Judgment
What Is a Deficiency Judgment?
A deficiency judgment is a court order requiring a borrower to pay the remaining balance on a loan after collateral has been sold and the proceeds were not enough to cover the full debt.
In mortgages, this most often occurs after a foreclosure or short sale if the home sells for less than the outstanding loan balance.
Example:
- Loan balance: $300,000
- Foreclosure sale price: $250,000
- Deficiency: $50,000
A lender may seek a deficiency judgment for the remaining $50,000, depending on state law.
Why It Matters in a Mortgage
A deficiency judgment can:
- Extend financial liability beyond foreclosure
- Result in wage garnishment or asset seizure
- Appear as a court judgment on credit reports
Some states have anti-deficiency laws that limit or prohibit lenders from pursuing borrowers for the remaining balance.
Whether a lender can seek a deficiency depends on:
- State law
- Loan type
- Terms negotiated in a short sale agreement
How It Works
- Property is foreclosed or sold short.
- Sale proceeds do not cover full loan balance.
- Lender petitions court for deficiency judgment.
- If granted, borrower becomes personally liable for remaining debt.
Example
A home is foreclosed and sold for less than the mortgage balance. The lender obtains a deficiency judgment for the remaining amount owed.
Deficiency Judgment vs Foreclosure
- Foreclosure involves taking and selling the property.
- Deficiency judgment seeks repayment of the remaining balance.
They are related but legally distinct processes.
FAQs About Deficiency Judgments
Are deficiency judgments automatic after foreclosure?
No, lenders must pursue them through legal action, and eligibility depends on state law.
Can deficiency balances be negotiated?
In some cases, lenders may agree to settle or waive the deficiency during a short sale.
Does bankruptcy eliminate a deficiency judgment?
Certain types of bankruptcy may discharge unsecured deficiency balances, subject to court approval.
Related Terms
