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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. 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 that the borrower would need to pay. Many states prohibit deficiency judgments after a home foreclosure. Where they are allowed, a lender generally must demonstrate through comparable listings and a professional appraisal that the price it received from selling the home was fair.
This safeguard prevents a bank from accepting a low offer and demanding the balance from the borrower. The lender must make a motion to request one. If the lender does not make the motion, then the court will find the money obtained from the sale of the foreclosed property to be sufficient.
A debtor who receives a deficiency judgment may seek exemption from the lender or other creditors, file a motion to have the judgment overturned, or, if necessary, declare bankruptcy. In any case, if a debtor is let off the hook from the full repayment of a loan, the forgiven debt is considered income by the Internal Revenue Service IRS and subject to taxes, with certain exceptions depending on the situation.
Most, but not all, states allow deficiency judgments following short sales , which is when a bank agrees to let a borrower sell a home at a price lower than the loan amount. A short sale can happen when real estate prices are falling, and a bank seeks to lessen its loss through a quick sale rather than going through foreclosure.
This action may be good for borrowers, depending on their individual circumstances. Likewise, deficiency judgments are usually permitted in a transaction known as a deed in lieu of foreclosure , when the bank agrees to take title to a property instead of foreclosing on it. Deficiency judgments are most common after mortgage foreclosures, although they are not allowed in every state.
The lender may be able to garnish your wages, put a lien on other property that you own, or take money out of your bank account. But there are ways you can avoid or handle a deficiency. And for foreclosures, short sales, and deeds in lieu of foreclosure, you might owe the IRS some money if the lender forgives the deficiency.
If you lose your home to foreclosure, you might still owe money to your lender. If you have a recourse loan, the bank may still go after your assets if it doesn't recoup all of its money in a foreclosure. Once a mortgage lender gets a deficiency judgment against you, it can then collect on that judgment. View More Articles.
Learn how to avoid owing your mortgage lender money after a short sale of your home. Nevada law prohibits the bank from getting a deficiency judgment after a short sale—or after a deed in lieu of foreclosure—under certain circumstances. The information provided on this site is not legal advice, does not constitute a lawyer referral service, and no attorney-client or confidential relationship is or will be formed by use of the site.
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