Deficiency Judgment

Definition

A deficiency judgment is a court order issued to a borrower indicating that they are still liable for the remaining balance on a loan after the collateral used to secure the loan is sold off and the proceeds fall short of the total amount owed.

Examples

Foreclosure Example: Upon default by the mortgagor, a lender forecloses on the mortgage. The unpaid balance of the loan is $102,000. The property is sold at a public auction and brings $80,000. The lender then seeks a deficiency judgment against the mortgagor to recover the $22,000 shortfall, plus foreclosure expenses.
Repossession Example: If a borrower defaults on an auto loan and the car is repossessed and sold for $5,000, but the loan balance is $8,000, the lender may seek a deficiency judgment for the $3,000 difference.

Frequently Asked Questions (FAQs)

Q: Can a deficiency judgment be avoided? A: Yes, a deficiency judgment can potentially be avoided through negotiations with the lender, loan modifications, or short sales agreements that waive the lender’s right to seek a deficiency judgment.

Q: Are deficiency judgments allowed in all states? A: No, deficiency judgments are not permitted in all states. Some states have laws restricting or banning them altogether, often referred to as “non-recourse” states.

Q: How is a deficiency judgment enforced? A: A deficiency judgment can be enforced like any other court judgment, which may include wage garnishments, bank account levies, or placing liens on other property owned by the debtor.

Q: Does bankruptcy affect a deficiency judgment? A: Yes, filing for bankruptcy may discharge a deficiency judgment, effectively eliminating the borrower’s obligation to pay the remaining debt.

Q: How long does a lender have to seek a deficiency judgment? A: The time frame within which a lender can seek a deficiency judgment varies by state and is governed by state statutes of limitations.

Foreclosure: The legal process by which a lender attempts to recover the balance of a loan by forcing the sale of the asset used as collateral.
Collateral: Property or other assets that a borrower offers as security for a loan.
Default: The failure to fulfill the legal obligations of a loan agreement.
Short Sale: The sale of a property for less than the balance owed on the mortgage.
Non-Recourse Loan: A loan that limits the lender to reclaiming the collateral, without holding the borrower personally liable for any remaining debt.
Auction: A public sale in which goods or property are sold to the highest bidder.

Online Resources

References

Miller, R.A., & Hollowell, B. (2018). Foreclosure and Mortgage Servicing. West Academic Publishing.
Bernhardt, R., & Palomar, J. (2021). Real Estate Transactions. Foundation Press.
Lindemenn, L.B., & Durham, J.J. (2020). Modern Real Estate Practice. Dearborn Real Estate Education.

Suggested Books for Further Studies

Fisk, R. (2019). The Real Estate Problems and Solutions Manual. McGraw-Hill Education.
Jones, K. (2021). Real Estate Law and Practice. Pearson Education.
Brown, E.C., & Williams, L.T. (2020). Practical Guide to Real Estate Law. Wolters Kluwer.

Real Estate Basics: Deficiency Judgment Fundamentals Quiz

### What is a deficiency judgment? - [ ] A reward given after paying off a loan. - [x] A court order requiring the borrower to pay the remaining balance on a loan after the collateral is sold. - [ ] An increase in the property's equity. - [ ] A reduction in loan interest rates. > **Explanation:** A deficiency judgment is a court order stating the borrower still owes money when the collateral for a loan does not cover a defaulted debt. ### Can a lender always obtain a deficiency judgment? - [ ] Yes, in all states without exception. - [x] No, some states prohibit or restrict deficiency judgments. - [ ] Only if the borrower agrees. - [ ] Only when no collateral is involved. > **Explanation:** Not all states allow deficiency judgments. Some states have laws restricting or banning them. ### What happens if the borrower cannot pay the deficiency judgment? - [ ] The lender forgives the debt automatically. - [x] The lender can enforce the judgment through wage garnishments or other means. - [ ] The borrower must sell all personal assets. - [ ] The borrower’s credit report remains unaffected. > **Explanation:** The lender can enforce the judgment through measures such as wage garnishments, bank account levies, or property liens. ### Can filing for bankruptcy discharge a deficiency judgment? - [x] Yes, in many cases. - [ ] No, bankruptcy has no effect. - [ ] Only for amounts over $50,000. - [ ] Only in recourse states. > **Explanation:** Filing for bankruptcy may discharge a deficiency judgment, eliminating the borrower’s obligation to pay the balance. ### What is collateral in the context of a deficiency judgment? - [ ] An additional loan option. - [x] Property or assets offered as security for a loan. - [ ] Grants from the government. - [ ] Mandatory insurance. > **Explanation:** Collateral is property or assets that a borrower offers to a lender to secure a loan. ### What do "non-recourse" loans entail in relation to deficiency judgments? - [ ] The lender can always seek deficiency judgments. - [ ] The loan involves no collateral. - [x] The borrower is not held personally liable for any remaining debt. - [ ] The lender gets no interest payments. > **Explanation:** Non-recourse loans limit the lender to reclaiming only the collateral, without holding the borrower personally liable for any remaining debt. ### What is a short sale? - [x] Selling a property for less than the balance owed on the mortgage. - [ ] Selling a property at a premium price. - [ ] A quick negotiation to avoid foreclosure. - [ ] An immediate full repayment of the remaining loan balance. > **Explanation:** A short sale is the sale of a property for less than the balance owed on the mortgage. ### How might a deficiency judgment be avoided? - [ ] By ignoring lender communications. - [x] Through negotiations, loan modifications, or short sales. - [ ] Only by refinancing. - [ ] By increasing the loan balance. > **Explanation:** Borrowers can potentially avoid deficiency judgments through negotiations, loan modifications, or short-sale agreements that waive the lender's right to seek a judgment. ### What is one common method lenders use to enforce a deficiency judgment? - [ ] Reducing the interest rate. - [ ] Donating the remaining debt to charity. - [x] Wage garnishments. - [ ] Extending the loan term. > **Explanation:** One common method for lenders to enforce a deficiency judgment is through wage garnishments. ### How is a deficiency judgment related to foreclosure? - [ ] It marks the end of foreclosure. - [ ] It happens before foreclosure. - [x] It occurs when the sale of foreclosed collateral fails to cover the loan balance. - [ ] It is unrelated to foreclosure. > **Explanation:** A deficiency judgment occurs when the sale of foreclosed collateral fails to cover the outstanding loan balance.