DEFICIENCY JUDGMENT: Guide to Deficiency Judgment

Deficiency Judgment
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No one ever wants to face foreclosure, talk more of a deficiency court ruling on their assets. Unfortunately, it is not about what we want but what we were able to manage and control. If your loan payment is up to date, and under control, it would never amount to a foreclosure or a deficiency judgment. However, unexpected events such as the loss of a job, economic downturns, prolonged illness, or disability are some of the reasons why people get stuck with them. So what is a deficiency judgment, and how do debtors manage debt or prevent a creditor from filing one against them? This guide is an overview of what deficiency Judgment in real estate is, and we will also examine the rules guiding this ruling in Florida.

Deficiency Judgment

Anyone who takes out a loan intends to pay it back. Unfortunately, that is often not the case. Although the lender takes certain measures to protect themselves, there are still records of defaulted loan payments. A loan provider will most likely begin the foreclosure procedure if you stop making payments on your mortgage loan, and this may lead to a deficiency judgment in real estate. However, creditors only use this means when debtors owe a big sum.

What Is Deficiency Judgment In Real Estate?

A deficiency judgment is a court ruling that permits a creditor to get more money from a debtor. However, before a creditor gets this ruling, there are preceding events. The first is that a debtor had defaulted on his loan payment. This usually leads to the creditor taking seizure of the asset which the loan was used to purchase. When this happens, the loan provider sells the asset to recoup the obligation. However, the proceed from the asset may be insufficient in covering the amount borrowed.  When this happens, the creditor is forced to get a deficiency judgment to recover the remaining balance.

Moreso, a creditor must be in a state that recognizes deficiency judgments and also prove that the asset was sold at a fair price before it will be granted.  Deficiency judgments are most common in mortgage foreclosure.

How Does Deficiency Judgment Work?

A deficiency judgment is a court ruling that allows a lender to collect more funds from a debtor who has defaulted on a loan if the loan’s secured property isn’t enough to pay off the full obligation. It applies to any secured loan, such as a vehicle loan and a confiscated property sold for less than the lender owes on it. 

There are several reasons why a debtor is unable to pay his loan. One of such is a downturn and economic conditions such as the covid-19. Loan providers try to avoid this situation by insisting on a mortgage deposit. But before that, they calculate the loan amounts based on the property’s appraised value. Then the deposit is requested to ensure that in the event of default, they get back their loan with the asset in question. 

Unfortunately, the measures taken to ensure payment is made sometimes fail and when this happens, the creditor applies for foreclosure. There are times when the money raised from a foreclosure sale does not cover the loan. This is when the creditor applies for a deficiency judgment to recover loans from debtors in real estate. However, he must present proof to the court that the asset sold and the initial deposit did not cover the loan in question. The proof is demanded to ensure a creditor is not trying to collect more than is due from a debtor.

How Do Creditors Get back Loans with Deficiency Judgments?

Having received a deficiency judgment against a debtor, they can do either of the following to get their money. 

  1. Seize the money in the creditor’s account
  2. Garnish creditor wages
  3. Place a lien on other property the creditor owns.

How Do Lenders Collect Deficiency Judgment?

After a foreclosure in real estate, not every state permits a deficiency judgment. However, if they are permitted in your state, and you have carried out a foreclosure sale. Apply to the court with the necessary documentation.

Steps to Creditors’ Deficiency Judgment

When a debtor default on payment, the following steps will guide your action from foreclosures to getting your deficiency judgment.

  1. Find out if your state permits judicial or nonjudicial foreclosure.
  2. If your state permit a judicial foreclosure, file a complaint, if it does not, then simply proceed with your foreclosure application.
  3. Seize asset
  4. Appraise asset if it is a house
  5. Compare listing price
  6. Sell off asset
  7. Request for judgment if the sales proceed did not meet the loan
  8. Present the evidence of sales, proof of listing, and appraisal.
  9. Get approval
  10. Take relevant action against the debtor

The evidence limits the loan provider from selling the asset below the market value. 

Debtors Protection Against Deficiency Judgments

In protecting oneself from a court ruling, debtors can do either of the following; 

  1. Seek to be exempted by the creditor
  2. Offer to renegotiate your payment plan with the lender
  3. File a legal appeal against the court judgment to have it overturn
  4. Declare personal bankruptcy

Duration Of  Deficiency Judgments

Deficiency judgments specify how long a lender has to collect his loan. There are times when a deficiency term expires and the creditor is still unable to clear his debt. In such cases, the creditor can apply to prolong the term. Also, the time allowed differs from state to state.

Let’s look at some examples.

  • In Maryland, lenders have 12 years to collect their obligation,
  • In Michigan, lenders have 10 years
  • While Illinois lenders have seven years 

Effect of Deficiency Judgment On Debtors

Debtors face several limitations when a deficiency judgment is passed on their credit history. Unless it falls off your credit rating, lenders will see this negative judgment.  Unfortunately, it means if you apply for a mortgage, auto loan, credit card, or other loans, a red flag shows up. This is a clear warning signal to the lenders who may not give you a loan anymore. The overall effect on debtors is mostly on their credit score. A deficiency judgment in addition to your missing mortgage payment is more damage.

Deficiency Judgment Foreclosure

Before a deficiency judgment will be granted to a creditor, the foreclosure must have taken place in real estate. Foreclosure is a legal procedure through which a lender attempts to recoup the amount owing on a defaulted debt by seizing and selling the mortgaged property is known as foreclosure.

How Foreclosure Sales Work

The foreclosure sale, which occurs after the lender has met all of the legal requirements for foreclosure, is the final step in a judicial or nonjudicial foreclosure. This is when the property is sold to a new person during a public auction.

The initial bid at the auction is made by the foreclosing lender, which is known as a “credit bid.” The lender receives a credit bid in the amount of the borrower’s debt. The lender can bid up to the full amount of the debt, including all fees associated with foreclosure, or it can bid less. In the absence of other bids,   the lender becomes the new owner of the property he made the highest bid. But if there are other deals, the highest offer gets the deal.

Most often, lenders bid less than the amount of a borrower’s mortgage debt during foreclosure auctions. Lenders apply for a deficiency judgment if, after the foreclosure, the debt remains a substantial amount. 

Dealing With Foreclosure Before It Gets to a Deficiency Judgment

In dealing wih foreclosure in real estate, a homeowner has the right to defend before it gets to a deficiency judgment. Defending allows the creditor to renegotiate his mortgage payment or seek a money settlement. 

What is a deficiency in debt recovery?

When a borrower defaults on a loan backed by collateral, the creditor may sell the collateral to try to recover the unpaid portion of the loan, which is known as a deficiency balance.

What is a deficiency case?

When a secured loan is in default and the proceeds from the sale of the collateral fail to fully satisfy the debt, the court will issue a deficiency judgment against the defaulting borrower. It enables the lender to get more money from the debtor to make up the shortfall.

Why did I get a notice of deficiency?

You will normally receive a statutory notice of deficiency advising you of the proposed change if the IRS proposes to change the amount of tax you owe.

What happens after notice of deficiency?

Only 90 days (150 days if the notification is sent to someone who is outside the country) after receiving your Notice of Deficiency (90-day letter) are left for you to submit a petition to the Tax Court.

What does deficiency notice mean in Court?

A deficient pleading is one that in some manner is lacking or done incorrectly. The notification you received ought to specify what has to be corrected on the document in order for it to be submitted, as well as the due date.

How do you protest a notice of deficiency determination?

A petition for redetermination must be submitted by the taxpayer in order to contest the notice (protest). This guide covers the necessary components of a protest as well as the deadlines for submitting a protest. A pre-hearing conference, formal hearing, informal conference, and final order of the Tax Commissioner may all be a part of the protest procedure.

Types Of Foreclosures

The most practiced foreclosures are judicial and non-judicial foreclosures. 

Judicial Foreclosure

The judicial foreclosures mandate a lender to file a complaint to the court before embarking on the foreclosure process. With this, the debtor is expected to file a response within several days. This is usually within 30 days or less. Failing to file a response means your creditor files for a default. Unfortunately, this permits him to begin the foreclosure process immediately. 

Non Judicial Foreclosure

In a non-judicial foreclosure, a loan provider can begin the foreclosure process without going through the courts in a nonjudicial foreclosure state. Your lender will give you a notice of default in a nonjudicial foreclosure, giving you a deadline to start making your missing payments. You can also file a lawsuit to stop a nonjudicial foreclosure, either on your own or with the help of an attorney.

Deficiency Judgment Florida

Deficiency judgment refers to the same thing in every state including Florida. However, foreclosures in Florida are judicial, which means that a lender must go to the state court to acquire one even before it gets to a deficiency judgment.

What you should know Deficiency judgment in Florida

  • Florida allows a deficiency judgment if the debtor received a foreclosure complaint from the creditor.
  • Secondly, only a  judge determines the amount of the deficiency judgment in Florida. This is to ensure the difference between the judgment amount and fair market value is not hyped. 
  • Also, loan providers have just one year to pursue a deficiency judgment on residential properties. 


Court ruling on deficit payment is something you want to avoid, trust me. But if for any reason, you default payment, you are already in the early stage of foreclosure or already received a notice of a deficiency judgment from your lender, please do not wait another minute to contact a foreclosure defense attorney. They most likely will help you out of it.

FAQs On Deficiency Judgment

Does California allow deficiency judgments?

California statute expressly states that shortfall is not permissible on purchase money loans. However, deficiency judgments are only allowed in California following a Judicial Foreclosure and if the anti-deficiency statute does not apply.

What is a deficiency claim?

A deficiency claim is a portion of a claim secured by a lien on the property that is greater than the property’s worth. The creditor is given a secured interest up to the value of its collateral in this situation, but any amount of its claim that exceeds the value of the collateral is categorized as an unsecured claim.

What property type is exempt from a deficiency judgment?

A deficiency judgment after a short sale of a residential property with no more than four units is generally prohibited under California law.

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