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What is a Deficiency Judgment?

A deficiency judgment is a court ruling issued against a debtor when the money realized from the sale of a property did not cover the payment of outstanding debt. It is a judgement that requires that a debtor pays more money to pay back an unsettled debt. A deficiency judgement is issued when a debtor in a secured loan is in default and the sale of property executed to pay back the debt is not sufficient to pay up the debt. In other words, a deficiency judgement is a judgement stating that a homeowner is yet to settle a lender in full even after the sale of a property.

How Does a Deficiency Judgment Work?

A deficiency judgement is mostly used in mortgages. When a homeowner is in default and a foreclosure judgement is given on the property, if after selling the property, the money realized from the sale is insufficient to repay the mortgage debt, a deficiency judgement can be issued. For instance, if the outstanding debt a homeowner owes is $500,000 and such a homeowner goes into default. The lender can seek a foreclosure judgment that allows the property to be sold in order to repay the debt. If after selling the property, the borrower raises $350,000 and is unable to recoup the full amount to be repaid to the lender, a deficiency judgement can be given. This judgment can be likened to a lien placed on the debtor for further money.

A High Bar for Deficiency Judgments

According to the law of many states, a deficiency judgement is not allowed after a foreclosure, rather, the remaining debt must be forgiven. Before the sale of property is done, the lender must consent to the price at which the property is being sold, the bank must also give an approval. The amount realized from the sale is given to the lender as a repayment for the debt. After this is done, many states disallow a deficiency judgement that requires the default borrower to pay an additional money. States that allow deficiency judgments do not make the judgement automatic, it is only seen as necessary of the lender moves a motion for further payment, if otherwise, the money generated from the foreclosed property is regarded as enough. In some other states, deficiency judgments are allowed in short sales which is a sale where a bank sells the property of a borrower at a price lower than the loan amount. When a deficiency judgement is given, a debtor seek an exemption or file a court motion which allows an overturning of the judgement. One quick way to achieve this is by filing bankruptcy which allows the remaining debt to be forgiven. The Internal Revenue Service in the US regard a forgiven debt as an income which individuals are expected to pay taxes on.

Related Topics

• What are the common types of security interest in real property (land)?
• What is a mortgage?
• How does a security interest protect the mortgage holder?
• Lis Pendens
• Deficiency Judgment
• What is a Deed of Trust or Security Deed?
• What is a Land Sale Contract?