by: Baran Bulkat, Attorney
If you stop making payments on your mortgage, car loan, or other secured debt, your lender has a right to foreclose on or repossess your property. If the lender can’t sell your house or car (or other property securing its loan) for enough money to cover the outstanding loan, it may be able to sue you to collect the remaining balance (called a deficiency). Read on to learn more about how you can get rid of deficiency judgments through bankruptcy.
Your mortgage lender typically has a lien on your house (your car lender has one on your car). If you default on the loan, the lender can sell your house through foreclosure or auction off your car after repossessing it. If the sale doesn’t bring in enough money to pay off the outstanding mortgage or car loan balance, the remaining amount is called a deficiency. Depending on the laws of your state, your lender may be able to sue and obtain a judgment against you for the unpaid deficiency balance.
Your lender doesn’t always have an automatic right to come after you for a deficiency balance. Most states permit car lenders to pursue borrowers to collect auto loan deficiencies. When it comes to mortgage loans, deficiency laws can be complex and differ significantly from state to state.
Some states only allow a single collection action (such as foreclosure or a lawsuit but not both) or prohibit mortgage lenders from suing borrowers for a deficiency altogether. However, in many states (called deficiency states), mortgage lenders can obtain deficiency judgments against you after foreclosure.
In general, whether your mortgage lender can come after you for a deficiency depends on:
If your lender gets a deficiency judgment against you, it can enforce the judgment by garnishing your wages, levying your bank accounts, or placing liens on your property. Filing for bankruptcy relief can wipe out your personal liability for a deficiency judgment. How the deficiency judgment will be treated in bankruptcy depends on whether you file for Chapter 7 or Chapter 13 bankruptcy.
Unless your lender has placed additional liens on your other assets after obtaining the deficiency judgment, the judgment is no different than any of your other general unsecured debts (such as credit card debt or medical bills). This means that your bankruptcy discharge will wipe out your obligation to pay back the deficiency judgment.
However, if the lender placed a lien on any of your properties using the deficiency judgment, Chapter 7 bankruptcy will not automatically remove that lien (your discharge only eliminates your personal liability for debts). In that case, you will have to file a motion and ask the court to avoid the lien.
Just like in Chapter 7, deficiency judgments are treated as unsecured debts in Chapter 13 bankruptcy unless your lender placed a lien on any of your assets prior to filing. This means that your lender will only receive a pro rata share of the amount going to your unsecured creditors through your repayment plan (typically pennies on the dollar). When you complete your Chapter 13 plan, the deficiency judgment will be discharged.