Understanding Deficiency Judgments

Deficiency judgment are court orders that make you personally liable for unpaid debt. They are often associated with foreclosures, when a home’s selling price is not enough to cover the loan balance. They can also be an issue with automobiles taken in repossession. Let’s take a closer look at what deficiency judgments are and if you should expect one.

Deficiency Judgment Overview

When you default on a loan and the lender repossesses your property, the value of the property may not pay off the loan. For example, you might owe $200,000 on your home, but it only sells for $180,000. You’re $20,000 short.

Because the lender wants all of the money back, they may take further legal action against you. Legal action to collect the remaining amount is called a deficiency judgment.

How Much is the Deficiency Judgment?

It will be no surprise that the unpaid debt ($20,000 in the example above) is part of the deficiency judgment. However, lenders can also sue for the costs associated with the foreclosure and pursuit of the deficiency judgment.

If The Deficiency Judgment is Successful

If your lender successfully wins a deficiency judgment against you, you are personally liable for the amount of the judgment. You are legally required to satisfy the deficiency judgment, and the lender can go after you if you don’t. They may be able to garnish your wages,levy bank accounts, or take personal items (not necessarily your home, car, or other essential items).

Retirement accounts are generally not at risk in a deficiency judgment, but you should check with a local attorney if you are at risk.

Is a Deficiency Judgment Likely?

If your lender is allowed to pursue a deficiency judgment, there is no way to know whether or not they will. In many cases, your lender will not go to the trouble. Legal action is expensive and time consuming, and people who just suffered a foreclosure often don’t have the assets or income needed to satisfy a deficiency judgment. If you had the resources, you wouldn’t have missed your payments in the first place.

For some loans, deficiency judgments aren’t even an option. 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 more information on recourse loans and individual state laws, see How Recourse Loans & Non Recourse Loans Work.

How Deficiency Judgments are Collected

Lenders don’t expect that you’ll just hand over the cash when they ask for it. To collect on a deficiency judgment, a lender might:

  • Collect cash with a bank levy
  • Pursue wage garnishment through an employer