Deficiency Judgments after Foreclosures and Short Sales

Those who have been forced to deal with foreclosure cannot imagine that anything could be worse. After going through the humiliation of losing a home due to a financial crisis, the homeowner could be convinced that this is the worse it could possibly get.  Then out of the blue, they receive notification that the lender who held the mortgage on their home is suing them. The same process can occur after a short sale.

What is a deficiency judgment?

When a home is sold at an auction after foreclosure proceedings have been completed or when a home is sold at a “short sale” the lender may not have collected the entire amount owed to them. The balance between the sale and the amount owed is considered a deficiency. In some states, lenders are allowed to sue the homeowner for this difference. If the lender is successful, they are awarded a deficiency judgment.

How can you prevent deficiency judgments?

In some states, a deficiency judgment is not allowed on a primary residence, though they may be allowed on vacation homes and investment properties, even in those states. For a homeowner who is uncertain about the laws in their individual states, they may want to research foreclosure laws when the process begins.  It is important to note that these laws do change from time to time, so it is important to follow up with a qualified attorney who practices locally to make sure that they have the right information.

Another way to help prevent a deficiency judgment, especially in the case of a short sale, is to get the approval of the lender. Another option is if the original mortgage document allows for a “deed in lieu of foreclosure”. If the lender accepts the deed, most states will not allow for a deficiency judgment.

What happens if you cannot pay a deficiency judgment?

Generally, a lender will be able to record the judgment on the debtor’s credit report. In many cases, a borrower who is not able to pay this amount may be forced into bankruptcy if the lender pursues them aggressively.  Chapter 7 bankruptcies would result in the deficiency being cleared from the credit report once the bankruptcy process has ended.  Chapter 13 bankruptcy would result (typically) in the lender accepting a smaller amount.  If bankruptcy is not filed, a judgment is only allowed to remain on the credit report for a period of seven years.

Will lenders always request a deficiency judgment?

Estimates vary greatly as to when a lender will ask for a deficiency judgment. In some cases, lenders will pursue a deficiency judgment when they feel the borrower has not acted in good faith to clear the debt. In other cases, lenders will file them automatically. When a second home or investment property is foreclosed on, a deficiency judgment may also be awarded and placed as a lien on a primary residence if the home is owned.

Is there a time limit for deficiency judgments?

When lenders are allowed by law to file a deficiency judgment, some states will impose time limits. These will depend largely on the laws of the individual state.  Some states may allow the lender to file a deficiency judgment only after the period of rights of redemption has expired.


As if losing a home to foreclosure is not challenging enough, a homeowner may also have to deal with a deficiency judgment after foreclosure and short sales. Prior to selling a home through the short sale procedure or losing a home to foreclosure, it would behoove the homeowner to contact an attorney if they live in a state that allows the lender to sue for a deficiency judgment. This can help protect them from further legal action and save some money in the long run.