You might think that your debts are behind you after a lender takes your property, but that’s not always the case. Creditors can continue to try and collect on a property you no longer own through deficiency judgments.
What Is a Deficiency Judgment?
A deficiency judgment is a legal order to pay off a loan balance after foreclosure or repossession. When a lender takes your property and sells it, the sales proceeds pay off your debt and any additional fees related to collections. But if the property doesn't sell at a high enough price to satisfy the debt, you may still owe money. The remaining amount is called a deficiency, and a deficiency judgment from a court makes you personally liable for any deficiency balance. As a result, lenders or debt collectors can try to collect the amount due.
Deficiency Judgment Example
When you default on a loan and the lender repossesses your property, your property's value may not be enough to pay off the loan.
Let's say you owe $200,000 on your home, but you can't afford mortgage payments anymore. Your lender forecloses on the home, and the property sells for $180,000. You're $20,000 short of paying off the $200,000 loan, so you have a $20,000 deficiency.
A deficiency judgment would allow your lender to pursue you for the remaining $20,000. The lender might also be able to add legal fees and other foreclosure-related costs to the total bill.
What Might Happen?
If your lender successfully wins a deficiency judgment against you, you're personally liable for the amount of the judgment. You’re legally obligated to pay your lender. If you don’t pay, your lender can try to collect using other methods.
In some cases, lenders themselves don’t do anything. Your account may be turned over to a collection firm, and the debt collector pursues the debt.
If your lender has won a deficiency judgment, it can take certain steps to collect. These may include:
- Garnishing your wages: Taking a portion of your paycheck until the debt is satisfied.
- Levying your accounts: Taking cash from your bank account to reduce the debt.
- Putting liens on other property: Taking a legal interest in items you own (although your home, car, and other essential items are often protected).
- Contacting you and requesting money: Debt collectors can be persistent and persuasive. If you don’t intend to pay or communicate with collectors, you can request that they stop contacting you. However, that doesn’t prevent them from taking the legal actions listed above.
Retirement accounts are generally not at risk in a deficiency judgment, but check with a local attorney to see if you are at risk. Collectors might ask you to voluntarily raid your retirement accounts, but you generally aren't legally required to do so. In some cases, it’s best to keep that money protected in a retirement account.
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, it’s not worth the trouble for lenders and collection agencies.
Legal action is expensive and time-consuming. Borrowers who just suffered a foreclosure or repossession often don't have assets or income available to pay off a deficiency balance. If you had the resources, you wouldn't have missed your payments in the first place.
In some cases, a deficiency judgment isn’t 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 example, in some states, a loan used to purchase your primary residence is a non-recourse loan (but if you take a second mortgage, that loan might be a recourse debt).
If you're concerned about the cost of consulting an attorney, consider contacting your local legal aid organization.
Facing a Deficiency Judgment?
If a creditor is trying to collect on a deficiency, speak with an attorney who is licensed in your state and familiar with debt collection. This is a legal action, and you need legal help.
It may be possible to fight the collection efforts or limit how much collectors can take, but you need a skilled attorney to review your case. Bankruptcy might also be an option for wiping out a deficiency judgment, but there will be side-effects (including potential damage to your credit).