Foreclosure: What is a deficiency judgement?

On Behalf of | Dec 17, 2021 | Foreclosure |

Facing foreclosure can be a nightmare. In addition to the financial hurdles a property owner is attempting to overcome, the emotional cost of the process may be just as bad. Making good decisions is critical, if difficult, and you need to understand your options and the consequences.

Deficiency judgements explained

Foreclosures are typically non-judicial in nature. This means the lender forecloses on the property without going through a court first. When the property is sold for less than what the borrower owed, a deficiency is created, so that the borrower still owes money after the foreclosure is concluded. A deficiency judgement is when the lender goes to court and gets a judgement, against the borrower, for the unpaid amount.

If the foreclosure is judicial in nature, the lender will often obtain a deficiency judgement concurrently. The unpaid money is then sought through normal means of collecting debt. This means the lender may be able to utilize wage garnishment or bank account liens. There are circumstances under which a deficiency judgement can be challenged – for instance, if the property was purchased by the lender.

Common alternatives to foreclosure are short sales and deeds in lieu of sale. Deficiency judgements can also be sought after these sales. The key is the language included in the short sale agreement or deed in lieu agreement. It must include language indicating that the lender is waiving its right to pursue a deficiency judgement. If the waiver is not in the agreement, there is nothing stopping the lender from coming after the borrower for remaining debt.