Deficiency Judgement

Deficiency judgement is what all homeowners in foreclosure or contemplating doing a real estate short sale are afraid of. If you are considering doing a real estate short sale, you may want to look into state law to see if your state protects you against deficiency judgement.

Some states have a no deficiency judgment law while others allow banks to come after homeowners for deficiency judgments. However, it has been known that even states which do not allow deficiency judgement, lenders still sue the homeowners in an effort to recoup their losses.

What is deficiency judgement?

When a bank loses money in a foreclosure sale or in a short sale, the bank may sue the homeowners for the differences between the mortgage balance and the proceeds from short sale or foreclosure sale.

Deficiency judgement example

A homeowner has a real estate property worth $200,000 with a $200,000 mortgage balance. In this case the homeowner is at par with the property value and not yet upside down. If the mortgage balance had been less than $200,000, then a short sale will not be possible because the homeowner will have equity in the home and potentially can sell the property for high enough value to repay the mortgage balance to the bank.

The homeowner cannot afford the mortgage payment and the home so enter into a short sale contract with a real estate investor. The bank accepts the short sale proposal for $100,000 as full payment. However, later on the bank can sue the homeowners for the $100,000 loss by way of deficiency judgement.

What happens when a bank sues for deficiency judgement?

The homeowners will have a judgement of $100,000 (in the above example) against them. This will have to be paid or it will end up in the court and the homeowners cannot move on. The homeowners can negotiate the deficiency judgement down to a lower payment, set up a payment plan, or file a personal bankruptcy and that deficiency judgement may get wiped off their records. Their credit histories will be ruined for many years because of the bankruptcy, of course. Also, not every bankruptcy case will end up in wiping off debt. Filing bankruptcy has gotten more complicated recently.