A deficiency balance is an amount that a homeowner owes the lender after selling a house at a foreclosure or short sale for less than the actual debt. In most states, the lender can recover a deficiency owed by the borrower. However, state laws typically require the amount of the deficiency to be measured by the difference between the property’s fair market value and the amount of the loan rather than by the sale amount. For example, suppose a home sells for $300,000 at a foreclosure auction. If the fair market value of the home is $400,000, and the borrower owes $500,000, the deficiency in most states will be $100,000, not $200,000.
The laws of most states allow the lender to come after you and get a judgment for the deficiency balance owed. A judgment allows a creditor to use collection procedures to collect from you without your consent. For instance, the lender can withdraw funds from your bank account (levy) or your paycheck (wage garnishment).
A few states, however, protect homeowners from liability for a deficiency from a mortgage on a residential home that was used to purchase the home or in other circumstances. You don’t need to worry about a deficiency if either of the following applies:
- Your state’s law prohibits deficiency lawsuits.
- The lender agrees not to pursue a deficiency after a short sale or deed in lieu of foreclosure.
If your state allows deficiency lawsuits, or you have a junior loan (perhaps a second or third mortgage) you didn’t use to purchase the home, you might still owe a lot of money after the foreclosure. In such a case, you can discharge (wipe out) the deficiency or surviving debt by filing for bankruptcy.
If you’re facing foreclosure and suspect that your home will sell for less than it’s worth at auction, consult with a bankruptcy attorney. It might turn out that a Chapter 7 bankruptcy will not only take care of your foreclosure issues but wipe out other nagging debt, as well.
Questions for Your Attorney
- Are deficiency judgments allowed in my state?
- Will I remain responsible for a mortgage that wasn’t used to purchase my property?
- Will filing for bankruptcy be a better option for me?