What is a Deficiency Judgment: Limitations & Consideration?


You for some reason fail to make your mortgage payments on time and your property has been sold at a foreclosure auction. You now move to a new house and take a sigh of relief thinking that the nightmare is over. You consider this a fresh start and you start rebuilding your new life.

But wait, your lender out of the blue contacts you and claims that you owe them even more money and that the foreclosure sale didn’t sufficient money to pay off your debt. And if you don’t pay the remaining debt, your mortgage lender will take you to court and file a deficiency judgement against you.

Definition of Deficiency Judgement

A deficiency judgment is a ruling made by a court against a borrower in default on a secured loan, indicating that the sale of a property to pay back the loan did not cover the outstanding liability in full.

Fundamentals of a Deficiency Judgement?

A deficiency judgment is a court ruling that places a lien on a debtor for further money when the sale of secured items is not enough for the full debt that is owed. Depending on one’s state, deficiency judgements maybe prohibited during a foreclosure. Deficiency judgments are permitted in a transaction called deed instead of foreclosure.

It is a legal order to pay off a debt after the completion of foreclosure or repossession of a property. When your property has been taken and sold by the lender, the sales pay off all your debt and any other fee related to the collection. But if the property sell fails to sell at a price high enough to fulfill the financial obligation, you will then still owe the lender money. The remaining amount that you owe is called a deficiency, and a deficiency judgment would be legal order from a court that will make you personally responsible for the deficiency balance. The lenders and debt collectors can then try to collect the amount that is due.

How a Deficiency Judgment Works?

A deficiency judgment could be applied to any secured loan where the home or the property is sold for less than the loan that is due for example a car loan. Mostly this term is associated with mortgage foreclosures.

Home mortgages exist to avoid getting a deficiency by obliging borrowers to make down payments and to base loans on the estimated value of the property. Practically, these measures ensure that the mortgage lender can sell the property to recover a loan.

Deficiency Judgement Forgiveness

To avoid a deficiency judgment entirely, a short sale agreement must expressly state that the bank (the lender) waives its right to the deficiency. If the short sale agreement doesn’t contain this waiver, the bank may file a charge to get a deficiency judgment. Though, if the bank forgives the deficiency, you might face tax penalties.


Limitations of Deficiency Judgments

Deficiency judgments are prohibited in many states after a foreclosure. The mortgage lenders should demonstrate through appraisals and comparable listing that the sale price of the property is fair enough in the states where the deficiency judgements are allowed. This measure allows the bank to demand the balance from the borrower and avoid getting a lowball offer.

Even in the states where a deficiency judgment is allowed, it is not automatic. The court will only consider a deficiency judgement if the mortgage lender asks for its granting. If the mortgage lender does not make a motion, then the court finds the money sufficient that is gained from the foreclosed property.

Additionally, a borrower who gets a deficiency judgment might be able to seek exemption from the mortgage lender or other creditors or he can file for a motion to have the judgment overturned. If all negotiations fail, he can even declare bankruptcy. But if a debtor is allowed “off the hook” from the full repayment of a debt, this forgiven debt would be considered income by the IRS and subject to taxes.

Deficiency judgments in most states are allowed as short sales, which is when a bank allows a borrower to sell his property at a price lower than amount of the loan. A low-priced sale can occur when prices in the real estate are falling and a bank seeks to recover the loss through a quick sale rather than getting a foreclosure done. Depending on their individual circumstances, this may prove beneficial for debtors.

Likewise, a deficiency judgment is usually allowed in a transaction known as a deed in lieu of foreclosure which is when the bank agrees to take the title of a property instead of foreclosing it.

Collections of Deficiency Judgments

A deficiency lawsuit is a lawsuit that is for the recovery of an unsecured debt, for example, such as a credit card loan or a medical bill. Your mortgage was a secured debt before the foreclosure of your property and you owed a certain amount of money to your bank and your guaranteed repayment of your home. Because of your failure to pay back your mortgage loan, the bank was obliged to sell your property to recover the debt. Even after the foreclosure, you still might owe your bank money called the deficiency but the security of your property is now gone. So the deficiency that you owe is now an unsecured debt.

You might be thinking how you still owe the bank more money after the foreclosure of your property because you don’t even own that property anymore. But when you took the mortgage initially, you signed two documents to buy that property. The first document was a promissory note in which you promised to repay the loan to your mortgage lender. The second document was a security agreement of a mortgage or a deed of trust in which you pledged your property as security for the loan. The security agreement gives the lender the right to foreclose your property to recoup the debt. Once the foreclosure is completed, the security agreement is no more valid. But the promissory note is still valid, and so is your obligation to repay any remaining debt.

If you are sued by your lender to recover the deficiency and wins, the court will be issuing a judgment for you to pay off the deficiency. If the court order is ignored, your lender can use this deficiency judgment to place liens on your property, can garnish your wages or freeze your bank account to recoup the debt.

What If you can’t afford the Deficiency?

If you do not have enough assets to afford a deficiency and you don’t want your wages to be garnished or your accounts to get frozen, you should consider talking to your mortgage lender. See if the lender might be interested in working out a repayment plan with you or can reduce the amount.

If all negotiations fail, the last resort will be filing for bankruptcy. If you somehow qualify for bankruptcy, it could pay off the deficiency debt along with most of your unsecured loans and debts. You might be repaying just a portion or none of your deficiency with your bankruptcy.

People think that their loans are far behind them after a lender takes their property, but that’s not always true. Creditors can continue to attempt and collect on a property that you no longer have the possession of only through a deficiency judgment.


Example of a Deficiency Judgment

When a person defaults on a loan and the mortgage lender repossesses your home, but the home’s value might not be enough to pay off the debt.

Let’s assume you owe a loan of $300,000 on your home, but you for some reason fail to pay the mortgage. Your mortgage lender then forecloses on the property and your home sells for $250,000. You’re now $50,000 short of paying off the $300,000 loan, so you have a deficiency of $50,000.

A deficiency judgment will allow the mortgage lender to sue you for the remaining $20,000. The lender can also the legal fees and other costs related to the foreclosure to the total bill.

What happens after a deficiency judgement?

When a mortgage lender successfully wins a deficiency judgment against you, you’re then responsible for the amount of the deficiency judgment. You’re now under a legal obligation to pay to your lender. If you don’t pay him the amount the lender has the right to collect the money using other methods.

The lenders don’t do anything in some cases. Your account then may get turned over to some collection firm and the debt collector can pursue the debt.

If your mortgage lender has won a deficiency judgment against you, he can take some steps to collect the amount. These may be:

Wage Garnishment

The lender may take a portion of your earning until the debt is satisfied.

Levying of accounts

The lender can withdraw cash from your bank account to reduce the debt.

Putting liens on other property

 The lender can take legal interest in items that you own (Your home, car, and other significant items are secured).

Asking you for money:

These debt collectors can contact you and ask you for money. If you are not willing to pay you can request them to not contact, you but this doesn’t stop them from taking legal actions in order to collect their debt.


How to avoid Deficiency Judgments in Foreclosure?

Even after the completion of a foreclosure, you can receive a call from the bank or your mortgage lender informing you that you owe them more money. A lawsuit can be filed against you by the Mortgage lenders even after the foreclosure sale to get additional money that they claim is owed. This is called a deficiency judgment, and it’s the difference between the original debt that you owe and the actual final sale price of the house that you foreclosed.

While some people don’t have assets enough to use them for deficiency judgments, there are several instances where a mortgage lender can decide on suing you for a deficiency.


If you want to avoid your foreclosure- there are still many options open for you. Call our lawyers right away at (888) 200-9824 for a confidential phone consultation about your situation. Check out our blog on whether you need a foreclosure lawyer or not?

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