How Are Deficiency Judgments Collected?

Your lender sues you for a deficiency and wins, but you can't afford to pay. Now what?

You fall behind on your mortgage payments. Your house is sold at a foreclosure auction. You move to a new home and breathe a big sigh of relief. The nightmare is over. It’s a fresh start, and you can now start rebuilding your life and credit.

But wait, your mortgage lender contacts you and says that you still owe them money. The foreclosure sale didn’t raise enough cash to pay off your mortgage loan. And if you don’t make up the difference between what you owed and the foreclosure sale price—the deficiency—your lender will take you to court and get a deficiency judgment.

Can Your Lender Sue You for the Deficiency?

Whether your lender can sue you to recover the deficiency depends on state law. Most states allow lenders to sue borrowers for deficiencies after foreclosure or, in some cases, in the foreclosure action itself. Some states allow deficiency lawsuits in judicial foreclosures, but not in nonjudicial foreclosures. Other states forbid deficiency lawsuits if the house that secured the mortgage was the borrower’s primary residence. Still others cap the amount that lenders can recover in deficiency lawsuits to the difference between the outstanding mortgage debt and the house's fair market value. (To find out whether lenders have the right to sue borrowers for deficiencies in your state and whether there are any restrictions on that right, see Anti-Deficiency Laws.)

Keep in mind that just because your lender can sue you for the deficiency, it doesn’t mean that your lender will sue you. Lawsuits are expensive. Your lender most likely won’t sue you if they think they won’t recover anything. If you, like many borrowers in foreclosure, have no income or assets that your lender can seize with a deficiency judgment, you’re considered “judgment proof,” and your lender probably won’t sue you for the deficiency.

How Deficiency Judgments are Collected

A deficiency lawsuit is like a lawsuit to recover an unsecured debt—such as credit card debt or medical bills—because the deficiency is exactly that, an unsecured debt. Before the foreclosure, your mortgage was a secured debt; you owed your bank a certain amount of money and your home guaranteed repayment. Because you failed to pay back your mortgage loan, the bank had the right to sell your home to recoup the debt. After foreclosure, you might still owe your bank some money (the deficiency), but the security (your house) is gone. So, the deficiency is now an unsecured debt.

You might be thinking to yourself, "But the bank foreclosed! I don't own the house anymore. How can I still owe them money?" When you originally took out the mortgage you used to buy your home, you signed two documents. One of these documents was a promissory note, in which you promised to repay the mortgage debt to your lender. The other document was a security agreement—a mortgage or deed of trust—in which you pledged your house as security for the loan. The security agreement gave your lender the right to foreclose. Once the foreclosure is over, the security agreement is no longer in effect. But the promissory note lives on, as does your obligation to repay any remaining debt.

If your lender sues you to recover the deficiency and wins, the court will issue a judgment ordering you to pay off the deficiency. If you ignore this court order, your lender can use the deficiency judgment to place liens on other property that you own, garnish your wages, or freeze your bank accounts.

What If You Can’t Pay the Deficiency?

If you can’t afford to pay back the deficiency and you want to avoid having your wages garnished or your accounts frozen, talk to your lender. See if the lender is willing to work out a repayment plan with you or settle for a reduced amount. (Be aware that, ordinarily, when $600 or more of debt is forgiven or canceled by a creditor, the amount that has been forgiven is considered income for federal tax purposes.)

If it won’t budge or negotiations fail for another reason, you might want to consider filing for bankruptcy. If you qualify for Chapter 7 bankruptcy, it could wipe out the deficiency debt, along with many of your other unsecured debts. With a Chapter 13 bankruptcy, you might have to repay just a portion or none of the deficiency. If you think bankruptcy might be a way out for you, talk to a bankruptcy attorney and do some research on your own. A good place to start is with The New Bankruptcy: Will It Work for You? by Cara O'Neill (Nolo).

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