Deficiency BalanceCredit Repair Definition
The remaining debt owed after collateral securing a loan is sold for less than the outstanding loan amount.
Definition
A deficiency balance is the amount of debt that remains unpaid after a secured loan defaults and the collateral (e.g., a house in foreclosure or a car in repossession) is sold by the lender for less than the total amount owed on the loan. For example, if you owe $200,000 on your mortgage and the lender forecloses and sells the house for $150,000, the deficiency balance is $50,000. Lenders may have the legal right to pursue the borrower for this remaining deficiency balance through a deficiency judgment, depending on state law and the terms of the loan agreement. Some states have anti-deficiency laws that limit or prohibit lenders from collecting deficiency balances in certain situations, particularly for primary residences.
Frequently Asked Questions
Can a lender always collect a deficiency balance?
No. State laws vary significantly. Some states prohibit deficiency judgments after foreclosure on primary residences (non-recourse states). Others allow them but may have restrictions. Lenders must typically file a separate lawsuit to obtain a deficiency judgment, which allows them to pursue collection through wage garnishment or bank levies.
Does a deficiency balance affect my credit?
Yes. The original default, foreclosure, or repossession severely damages your credit. If the lender obtains a deficiency judgment, that judgment will also appear as a negative public record on your credit report, further harming your score and remaining for seven years or longer depending on state law.
Can deficiency balances arise from short sales or deeds in lieu?
Yes. In a short sale (selling for less than owed) or deed in lieu, a deficiency balance exists if the sale price or property value doesn't cover the full debt. Borrowers should negotiate with the lender to waive their right to pursue a deficiency judgment as part of the agreement for a short sale or deed in lieu, and get this waiver in writing.
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