Deficiency Judgment: What It Is and How to Avoid It

A deficiency judgment is a court order that requires a borrower to pay the difference between the sale price of their foreclosed home and the amount they still owe on their mortgage. This can be a devastating financial blow.

In the United States, deficiency judgments are allowed in most states, but some states have laws that prohibit them entirely. For example, in California, Nevada, and Texas, lenders are not allowed to pursue deficiency judgments.

If a lender is allowed to pursue a deficiency judgment, they can sue the borrower for the remaining balance on the mortgage. This can happen even if the borrower has already lost their home through foreclosure.

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A deficiency judgment is an unsecured money judgment against a borrower whose mortgage foreclosure sale did not produce sufficient funds to pay the underlying promissory note.

It's a court judgment that's a public record of the amount owed and by whom, and it's different from a deficiency, which is the difference between the amount owed on a loan and the total amount received or collected.

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In many states, items included in calculating the amount of a deficiency judgment include the loan principal, accrued interest, and attorney fees, less the amount the lender bid at the foreclosure sale.

The lender must file a motion for deficiency to obtain a deficiency judgment against the borrower after the foreclosure sale, and the homeowner can defend the motion and contest the lender's valuation.

The court must hold a separate hearing on the lender's request for deficiency if the homeowner files a defense, and the lender must show the court evidence that the property's value on the sale date was less than the note balance.

A deficiency judgment can be sought against a borrower in any jurisdiction, including those that follow the title or lien theory of mortgages.

In states that follow the lien theory of mortgages, a deficiency judgment is typically allowed, although some states have narrowed the time periods to seek a deficiency judgment.

The lender may seek a deficiency judgment when a borrower defaults on their mortgage, especially in a real estate downturn, such as the one that occurred in 2008, when a home's value can drop below the amount of the outstanding loan.

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A deficiency judgment is a court ruling that allows a lender to collect additional funds from a debtor when the sale of their secured property falls short of paying off the full debt.

In other words, if a lender sells a foreclosed property for less than the original loan amount, they can take the borrower to court to collect the remaining balance.

Some states have laws that prevent lenders from collecting a deficiency judgment after a home foreclosure. This means that even if a lender sells a property for less than its worth, they can't demand the borrower pay the difference.

A deficiency judgment can have serious consequences for a borrower, including wage garnishment, seizure of other property, and even money taken from their bank account.

Here are some key facts to keep in mind:

Lenders can collect deficiency judgments in various ways. They may put a lien on other property that the debtor owns, garnish the debtor's wages, or levy (take money from) the debtor's bank account.

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A lender must demonstrate that the price it received from selling the home was fair through comparable listings and a professional appraisal. This safeguard prevents a bank from accepting a low offer and demanding the balance from the borrower.

If the lender succeeds in obtaining a deficiency judgment, it can attempt to collect the money in different ways, including garnishing the debtor's wages, levying the debtor's bank account, or putting a lien on other property.

Some lenders won't pursue a deficiency judgment against borrowers even if they have the right to do so. This might depend on how much you owe and whether your lender thinks it is worthwhile to pursue what could be a lengthy and expensive legal action.

If the lender is able to get a deficiency judgment, it may use standard collection techniques like garnishing the borrower's wages, levying a bank account, or attaching a lien to property to compel the borrower to pay it.

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If you're facing a deficiency judgment, it's essential to know your options. You may be able to negotiate another repayment arrangement with the lender or challenge the deficiency judgment in court.

Personal bankruptcy is another option, but it can have long-term consequences and shouldn't be entered into without seriously weighing the pros and cons.

To avoid a deficiency judgment after a short sale, the short sale agreement must state that the transaction fully satisfies the debt and that the lender waives its right to the deficiency. If the lender doesn't agree to fully waive the deficiency, you can ask for a reduced deficiency amount.

You might be able to work out a repayment agreement with the lender. If the lender gives up its right to some or all of the deficiency and sends you an IRS Form 1099-C, you might have to include the forgiven debt as income on your tax return and pay taxes on it.

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Here are some resources to help you navigate the process:

A deficiency judgment is a court judgment that's a public record of the amount owed and by whom.

In some jurisdictions, the original loan(s) obtained to purchase property are non-recourse, but subsequent refinancing of a first mortgage and/or acquisition of a 2nd (3rd, etc.) are recourse loans.

To obtain a deficiency judgment, the lender must file a lawsuit following a nonjudicial foreclosure, or as part of the underlying foreclosure lawsuit in a judicial foreclosure.

A few states require a separate lawsuit for a deficiency judgment, while others allow the lender to seek it as part of the foreclosure process.

In Florida, for example, a mortgage foreclosure does not automatically result in a deficiency judgment, and the lender must file a motion for deficiency to obtain one.

The lender will allege the property's market value on the sale date and the deficiency amount, and the homeowner can defend the motion and contest the lender's valuation.

Additional reading: Recourse Note

The court will not give the mortgage lender a deficiency judgment against the borrower if it finds that the foreclosed property was worth more than the note balance on the sale date.

In most cases, a deficiency judgment requires the lender to produce a valuation expert witness to prove the property's value on the sale date.

A 2013 Florida statute gives the mortgage lender one year after the foreclosure sale to file a motion for deficiency.

Second mortgage lenders and private lenders are more likely than first mortgage holders to sue borrowers personally for default on the underlying promissory note.

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If you're facing foreclosure, there are alternatives to consider before it's too late. You might be able to protect yourself against a deficiency judgment by selling your home in a short sale, completing a deed in lieu of foreclosure, or filing for bankruptcy.

Some states have laws that prohibit deficiency judgments after a foreclosure, but not after a short sale. For example, California has a law that forbids a deficiency judgment after a short sale under certain circumstances.

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You can also avoid a deficiency judgment by working out a repayment agreement with the lender or having the short sale agreement state that the transaction fully satisfies the debt and that the lender waives its right to the deficiency.

Here are some alternatives to foreclosure:

Keep in mind that filing for bankruptcy should be considered carefully, as it may not be the best solution for everyone. However, it can help wipe out your liability to pay a deficiency judgment and other debts.

Foreclosures can be a lengthy process, taking anywhere from 6 to 12 months to complete.

The lender will typically send a default notice to the homeowner after missing three consecutive mortgage payments, giving them a chance to catch up on the payments.

Homeowners can face a Notice of Acceleration, which demands the full amount of the loan be paid within a certain timeframe, usually 30 days.

A foreclosure sale can be delayed if the homeowner files for bankruptcy or seeks a temporary restraining order.

The lender can then auction off the property to the highest bidder, with the homeowner potentially owing the difference between the sale price and the amount owed on the loan.

Homeowners can also face a deficiency judgment, where the lender sues them for the remaining balance owed on the loan.

A short sale can be a good option for homeowners who are struggling to make mortgage payments, but it's essential to understand the risks involved. In most states, a lender can still pursue a deficiency judgment after a short sale, which means they can try to collect the remaining balance of the loan from the homeowner.

A short sale occurs when a bank agrees to let a borrower sell a home at a lower price than the loan amount, typically to avoid foreclosure. This can happen when real estate prices are falling, and the bank seeks to minimize its loss through a quick sale.

To avoid a deficiency judgment after a short sale, the agreement must clearly state that the transaction fully satisfies the debt and that the lender waives its right to the deficiency. If the lender doesn't agree to waive the deficiency, the homeowner can ask for a reduced deficiency amount.

In some states, like California, there are laws that prohibit deficiency judgments after a short sale under certain circumstances. However, most states don't have this kind of law, so homeowners need to be careful and negotiate the terms of the short sale agreement carefully.

Here are some key things to consider when it comes to short sales and deficiency judgments:

If the lender agrees to waive the deficiency, the homeowner might still have to include the forgiven debt as income on their tax return and pay taxes on it. This is why it's essential to work with a qualified attorney or financial advisor to navigate the short sale process and minimize the risk of a deficiency judgment.

State laws regarding deficiency judgments vary widely, with some states allowing them in most cases and others prohibiting them altogether. Alaska, California, Minnesota, Montana, Oregon, and Washington are the six states that forbid deficiency judgments in most cases.

In some states, lenders can only pursue a deficiency judgment under certain circumstances. For example, in Arizona, lenders can't purchase deficiencies for one- or two-family homes on 2.5 acres or less, while in North Dakota, courts can file deficiency judgments, but usually not for owner-occupied homes.

Here's a breakdown of some key states and their deficiency judgment laws:

It's worth noting that even in states where deficiency judgments are allowed, lenders may not always pursue them, especially if the amount is relatively small.

Most states allow deficiency judgments, but there are some exceptions. Alaska, California, Minnesota, Montana, Oregon, and Washington forbid deficiency judgments in most cases.

Some states only allow deficiency judgments under certain circumstances. In Arizona, lenders can't purchase deficiencies for one- or two-family homes on 2.5 acres or less. In North Dakota, courts can file deficiency judgments, but usually not for owner-occupied homes.

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If you live in a state that prohibits deficiency judgments after a non-judicial foreclosure, you likely don't need to worry about one. However, whether your lender will seek a deficiency judgment from you depends on various factors, including the deficiency amount, your finances, and the lender's policies.

Here's a breakdown of states that allow deficiency judgments:

State law often limits the amount of a deficiency judgment. This is a crucial fact to know if you're facing foreclosure.

Many states have a law that limits the deficiency amount to the difference between the debt and the property's fair market value. For example, if you owe $350,000 and the fair market value of your home is $325,000, the deficiency judgment will be restricted to $25,000.

In some states, this limitation is determined by a complex statutory appraisal process. This means that the fair market value of your home is carefully calculated to determine the maximum amount of the deficiency judgment.

If your state has a law limiting the deficiency amount, you may be able to avoid paying the full amount of the debt. However, this will depend on the specific laws in your state and the circumstances of your foreclosure.

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You might be able to protect yourself against a deficiency judgment by selling your home in a short sale, completing a deed in lieu of foreclosure, or filing for bankruptcy. These options can help you avoid a deficiency judgment, which can be a significant financial burden.

If you're facing foreclosure, you might be wondering what happens next. You can use a foreclosure survival guide to help navigate the process. This guide can help you provide your contact information and choose attorneys to contact you.

Some states allow deficiency judgments after a foreclosure sale, but others do not. You can refer to a state-by-state chart to see if a deficiency judgment is allowed in your state. This can help you understand your rights and options.

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If you're facing foreclosure, it's essential to explore alternatives to save your home. You can sell your home in a short sale, which can help you avoid a deficiency judgment. This is a viable option if you're unable to make mortgage payments.

A short sale can also provide a clean slate, allowing you to start fresh without the burden of a deficiency judgment. However, be aware that a short sale may impact your credit score.

Consider completing a deed in lieu of foreclosure, which can also help you avoid a deficiency judgment. This involves transferring the ownership of your home to the lender in exchange for canceling your mortgage debt.

You can also file for bankruptcy, which can provide temporary protection from foreclosure and potentially eliminate your mortgage debt. However, this should be a last resort, as it can have long-term effects on your credit score.

It's worth noting that some states allow deficiency judgments, which can be a significant concern for homeowners. Check the state-by-state chart to see if your state allows deficiency judgments.

Here's a brief overview of the alternatives:

Remember to consult with a foreclosure lawyer to determine the best course of action for your specific situation.

If you're facing foreclosure, it's essential to understand the process and your options. A deficiency judgment is a court order that requires you to pay the difference between the sale price of your home and the amount you owe on your mortgage.

In a nonjudicial foreclosure, the lender must file a lawsuit to get a deficiency judgment, while in a judicial foreclosure, the lender can seek a deficiency judgment as part of the underlying foreclosure lawsuit. A few states require a separate lawsuit, so it's crucial to know your state's laws.

You might be able to protect yourself against a deficiency judgment by selling your home in a short sale or completing a deed in lieu of foreclosure. These alternatives can help you avoid a deficiency judgment and the associated debt.

If you're facing a deficiency judgment, you have rights as a borrower. Junior lienholders, like second mortgage lenders, may still be able to sue you personally if the foreclosure sale proceeds weren't sufficient to pay what you owe.

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To navigate the foreclosure process, it's essential to understand the role of junior liens. When a senior lienholder forecloses, any junior liens are also foreclosed, and those junior lienholders lose their security interest in the real estate.

Here are some key facts to keep in mind:

If you're facing foreclosure, it's crucial to seek professional help. A foreclosure lawyer can guide you through the process and help you explore your options.

You might have a defense to a deficiency judgment, such as not being personally served the summons and complaint, which means you didn't appear in the action if required. This can be a strong argument in your favor.

Not being personally served is just one possible defense, and the specifics can vary depending on state law. In some cases, the home's fair market value was less than the plaintiff says it was at the time of the sale, which can also be a valid defense.

If you're facing a deficiency judgment after a short sale, you might be able to work out a repayment agreement with the lender or ask for a reduced deficiency amount.

The Fair Debt Collection Practices Act is a crucial law that protects consumers from abusive debt collection practices. It's a federal law that applies to debt collectors who work for third-party companies, not the original lender.

Debt collectors who buy deficiency judgments from lenders often sell them at a discounted price, which means they're not getting the full amount owed. This can lead to aggressive collection tactics.

The Fair Debt Collection Practices Act restricts debt collectors from using certain tactics to collect debt, such as calling you repeatedly or threatening to harm your credit score. It also requires collectors to provide written notice of the debt and the amount owed.

If a debt collector is violating the Fair Debt Collection Practices Act, you may be able to sue them for damages. This can be a powerful tool to stop the harassment and get some relief.

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You might be able to challenge a lawsuit for a deficiency judgment if the lender used robosigned documents to foreclose. This is a common defense that can be used to dispute the lender's right to a deficiency judgment.

If the lender didn't pay fair market value at the foreclosure sale, you might be able to challenge the amount of the deficiency judgment. Many states have laws that limit the amount of the deficiency to the difference between the total mortgage debt and the property's fair market value.

A deficiency judgment can be challenged in a separate lawsuit after the foreclosure, giving you the opportunity to dispute the lender's claims. You'll need to work with an attorney to determine the best course of action and to present your case in court.

If you live in a state with a law that limits the amount of the deficiency based on fair market value, you may be able to get the court to limit the deficiency judgment to the difference between the total debt and the fair market value of the home. This can be a significant reduction in the amount you owe.

You might be able to challenge the lender's right to a deficiency judgment if the foreclosure sale was conducted improperly, such as if the lender used robosigned documents. This can be a strong defense against a deficiency judgment.

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