How do deficiency judgments work

Create a personalised content profile. Measure ad performance. Select basic ads. Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. 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 fails to cover the debt in full. It allows the lender to collect additional money from the debtor to make up the difference.

The legal principle of a deficiency judgment could apply to any secured loan, such as a car loan, where property seized from a defaulting debtor sells for less than the lender is still owed on it. In most cases, however, the term is associated with mortgage foreclosures ,.

Home mortgages are designed to avoid a deficiency by basing loan amounts on the appraised value of the property and requiring borrowers to make a down payment. That way, the lender is putting less money 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. But in a real estate downturn, such as the one that occurred in , a home's value can drop below the amount of the outstanding loan on it.

This is sometimes referred to as an underwater mortgage. When a borrower defaults on their mortgage under such circumstances, the lender may seek a deficiency judgment. That is the amount the borrower would need to pay. State laws against deficiency judgment claims usually don't apply to second mortgages such as home equity loans. Many states prohibit deficiency judgments after a home foreclosure.

It may be the case that the mortgage company pursues a judicial foreclosure. If so, the foreclosure process will take longer, but it will be easier to defend against this action as a result. A creditor can obtain a deficiency judgment during the judicial foreclosure process. If the mortgage company pursues a non-judicial foreclosure, it will likely progress quicker than a judicial foreclosure would.

In a nonjudicial approach, the mortgage company will have to file a separate lawsuit to obtain a deficiency judgment. Some states bar a mortgage company from seeking a deficiency judgment unless they use a judicial foreclosure. With a judicial foreclosure, the mortgage company must go to court and get a judge's permission before they begin foreclosing on your real property.

Navigating a lawsuit, judgment, and a sale takes time. As a result, a judicial foreclosure process can take two years or longer to complete. Because of the backlog in many courts due to COVID , you can expect these procedures to take even longer. A non-judicial foreclosure is the more common type of foreclosure. It's much quicker since the mortgage company doesn't need to file a lawsuit before beginning the foreclosure process. A nonjudicial foreclosure process may require as little as a homeowner missing a few months of your mortgage payments and a law firm running three weeks of advertisements of the foreclosure sale in the legal notices of a local newspaper for the mortgage company to begin the foreclosure process.

Foreclosure sales are often conducted by auction on the courthouse steps. A court clerk may come out and call for bids. The only bidder may be a representative of the mortgage company. It's common for people passing by to have no clue what's going on.

In some non-judicial foreclosure states, the foreclosure notice is only required to give the date of the sale and say the time of foreclosure is "during the legal hours of sale. For this reason, few bidders show up. With few bidders, the homes are rarely sold for fair market value, increasing the amount of the deficiency even further. The former homeowners remain responsible for this debt.

After a foreclosure sale, there is a brief redemption period. During the redemption period, if you're able to find enough money to pay off your mortgage balance, you can pay off the balance and your home will be returned to you.

These redemption periods vary by state law. In some states, when a mortgage lender seeks a deficiency judgment, the redemption period restarts. Your house is sold at a foreclosure auction. You move to a new home and breathe a big sigh of relief. The nightmare is over. It's a fresh start, and you can now start rebuilding your life and credit. But wait, your mortgage lender contacts you and says that you still owe them money. The foreclosure sale didn't raise enough cash to pay off your mortgage loan.

And if you don't make up the difference between what you owed and the foreclosure sale price—the deficiency—your lender will take you to court and get a deficiency judgment. Whether your lender can sue you to recover the deficiency depends on state law. Most states allow lenders to sue borrowers for deficiencies after foreclosure or, in some cases, in the foreclosure action itself.

Some states allow deficiency lawsuits in judicial foreclosures , but not in nonjudicial foreclosures. Other states forbid deficiency lawsuits if the house that secured the mortgage was the borrower's primary residence. Still others cap the amount that lenders can recover in deficiency lawsuits to the difference between the outstanding mortgage debt and the house's fair market value.

To find out whether lenders have the right to sue borrowers for deficiencies in your state and whether there are any restrictions on that right, see Anti-Deficiency Laws.

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. 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 debt. If you're concerned about the cost of consulting an attorney, consider contacting your local legal aid organization. If a creditor is trying to collect on a deficiency, speak with an attorney 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 collectors can take, but you need a skilled attorney to review your case.

Bankruptcy might also be an option for wiping out a deficiency judgment, but there will be side-effects including potential damage to your credit.

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