Bankruptcy & Foreclosure: Mortgage Deficiency Judgments

In some states, you may be on the hook for a mortgage deficiency after foreclosure. Bankruptcy can wipe out your liability.

If you default on your mortgage, your lender can foreclose on your home. Depending on your state’s laws, if the proceeds from the foreclosure sale are not enough to pay off your mortgage balance, you may be on the hook for a deficiency. Read on to learn more about how bankruptcy can wipe out a mortgage deficiency judgment.

What Is a Mortgage Deficiency Judgment?

Your mortgage is a  secured debt. This means that your home essentially acts as collateral for your loan. If you don’t make your mortgage payments, the lender can take back the house through foreclosure.

If your lender forecloses on your home, it will typically conduct a sale to auction off the house to the highest bidder. If the sale proceeds are not enough to cover your mortgage balance, the remainder is called a deficiency. In certain states, mortgage lenders are allowed to sue borrowers for a deficiency balance. If your lender sues you, it can obtain a deficiency judgment against you for the unpaid balance. (Learn more about deficiency judgments after foreclosure.)

When Can a Mortgage Lender Come After You for a Deficiency?

The answer depends on multiple factors including:

Certain states don’t allow mortgage lenders to pursue borrowers for a mortgage deficiency at all. Others offer lenders a choice between foreclosure or a lawsuit (but not both). This is commonly referred to as the single action or one action rule.

However, keep in mind that some states (called deficiency states) permit mortgage lenders to sue borrowers for a mortgage deficiency. If your lender obtains a deficiency judgment against you, it can start garnishing your wages or placing liens against your assets to satisfy the judgment. Because deficiency laws are complex and vary from state to state, consider talking to a knowledgeable attorney in your area to learn whether you may be on the hook for a mortgage deficiency.

A Bankruptcy Discharge Can Eliminate Your Deficiency Judgment

In general, a mortgage deficiency judgment is treated like any other general unsecured debt (such as medical bills) in bankruptcy. This means that whether you file for  Chapter 7 bankruptcy or  Chapter 13  bankruptcy, once you receive your discharge your personal liability for a mortgage deficiency will be wiped out.

But keep in mind that if the mortgage lender has already placed a lien on any of your other property, your discharge will not automatically get rid of that lien. In that case, you will need to file a separate motion with the court to avoid the lien. (To learn more, see Releasing Liens in Bankruptcy.)

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