What Is a Deficiency Judgment?

A deficiency judgment is a court ruling against a debtor who is in default on a secured loan when the sale of the property that secured the loan fail♈s to c💙over the debt in full. It allows the lender to collect additional money from the debtor to make up the difference.

How a Deficiency Judgment Works

The legal principle of a deficiency judgment could apply to any secured loan, such as a car loan, where property seized from a 澳洲幸运5官方开奖结果体彩网:defaulting debtor sells for less than the lender is still owed on it. In most cases, however, the term is associated with mortgage 澳洲幸运5官方开奖结果体彩网:foreclosures.

Home mortgages are designed to avoid a deficiency by basing loan amounts on the 澳洲幸运5官方开奖结果体彩网:property's appraised value and requiring borrowers to make a 澳洲幸运5官方开奖结果体彩网:down payment. That way, the len🃏der puts less mon൩ey at risk than the property is worth.

In theory, those safeguards ensure that the lender can sell the property for enough money to recoup its loan should the borrower default. However, in a real estate downturn, such as 澳洲幸运5官方开奖结果体彩网:the one that occurred in 2008, a home’s value can drop below the amount of the outstanding loan on it. This is sometimes referred to as an 澳洲幸运5官方开奖结果体彩网:underwater mortgage. When a borrower default🌃s 📖on their mortgage under such circumstances, the lender may seek a deficiency judgment.

Example of a Deficiency Judgment

Consider a home bought for $300,000 with a $30,000 down payment and a $270,000, 30-year mortgage at an interest rate of 4%. The borrower defaults on the $270,000 loan after two years, leaving a 澳洲幸运5官方开奖结果体彩网:principal balance of about $260,000. The bank sells the home for $245,000, then wins a🧔 deficiency judgment against the borrowe✤r for the remaining $15,000. That is the amount that the borrower would need to pay.

How Do Lenders Collect Deficiency Judgments?

Many states prohibit deficiency judgments after a home foreclosure. Where they are allowed, a lender must demonstrate through comparable listings and a professional 澳洲幸运5官方开奖结果体彩网:appraisal that the price it received from selling the home was fair. Thౠis safeguard prevents a bank from accepting a low offer and demanding the balance from the b🅺orrower.

Even where they’re allowed, deficiency ღjudgments are not automatic. The lender must make a motion to request one. If the lender does not make the motion, the court will find the money obtained from the sale of the foreclosed property to be sufficient.

If the lender succeeds in obtaining a deficiency judgment, it can attempt to collect the money in a variety of ways, including putting a lien on other property that the debtor owns, 澳洲幸运5官方开奖结果体彩网:garnishing the debtor’s wages, or levying (taking money from) the debtor’s bank account.

What to Do When Facing a Deficiency Judgment

A debtor who receives a deficiency judgment may seek exemption from the lender or other creditors, file a motion to overturn the judgment, or, if necessary, declare 澳洲幸运5官方开奖结果体彩网:bankruptcy.

In any case, if a debtor is let off the hook from the full repayment of a loan, the 澳洲幸运5官方开奖结果体彩网:forgiven debt is considered income by the 澳洲幸运5官方开奖结果体彩网:Internal Revenue Service (IRS) and subject to taxes, with certain exceptions depending on the situation.

Deficiency Judgments and Short Sales

Most, but not all, states allow deficiency judgments following 澳洲幸运5官方开奖结果体彩网:short sales, which is when a bank agrees to let a borrower sell a home at a price lower than the loan amount. A short sale can happen when real estate prices are falling, and a bank seeks to lessen its loss through a quick sale rather than going through foreclosure. This action may be good for borrowers, depending on their circumstan🏅ces.

Likewise, deficiency judgments are usually permitted in a transaction known as a 澳洲幸运5官方开奖结果体彩网:deed in lieu of foreclosure, when the bank agrees to take title to a property instead of foreclosing on it.

The Bottom Line

If your home is foreclosed but the resale of your home hasn't paid your full debt, you may receive a deficiency judgment. Although it sounds bleak, you still have options. You can seek exemption from the lender or other creditors, file a motion to overturn the judgment, or declare 澳洲幸运5官方开奖结果体彩网:bankruptcy. Before choosing that option, ask your lender if they might negotiat𒅌e a repayment plan you can com✱mit to.