A deficiency judgment is a special type of legal judgment available in some states in the United States. It is a legal judgment that a bank or lender can obtain if a foreclosure does not satisfy the full amount of mortgage debt. The bank will have to sue to obtain a deficiency judgment, which can then be enforced by various legal means.
In a foreclosure situation, a homeowner ceases to pay his mortgage payments. The home is collateral on the mortgage loan, so the bank is entitled to seize the home. When a bank seizes a home, the home may then be sold at a foreclosure auction.
In many situations, the amount that the bank obtains in the auction for the sale of the home is not sufficient to cover the full amount that the homeowner owes on it. This is especially true when the bank factors in legal fees for the foreclosure and fees associated with late payments and the sale of the home. As a result, the homeowner who has had his home foreclosed on may still owe the bank money. Some, but not all, jurisdictions in the United States allow banks to sue the homeowner in a deficiency judgment in order to recover that money. Some banks do not permit a deficiency judgment action, because the home was the sole collateral on the secured loan.
When a deficiency judgment is permitted, the bank or other lender must sue the homeowner in court. The bank must prove that the amount the homeowner owed was not fully satisfied by the sale of the home at the foreclosure auction. This involves showing evidence of loan statements, sale records, and other related financial documents.
If the bank wins the deficiency judgment, the homeowner will then have a judgment listed on his credit report. This is a separate listing in the public records section of the credit report, in addition to the foreclosure judgment. This judgment will remain on the homeowner's credit report for a period of ten years, adversely impacting the his or her credit score.
The homeowner will also usually be required by the court to pay the money that is owed to the bank in order to satisfy the full debt. This amount is generally equal to the difference between what the bank was owed, including legal fees for the foreclosure, and the amount of money the bank got for the sale of the home. The court will determine the amount of money the homeowner owes in the deficiency judgment on the basis of evaluating the bank's financial records.
If the homeowner is unable to pay the money to satisfy the judgment, the court may place a lien on any other property the homeowner owns. The court may also garnish the homeowner's wages. This involves taking money from his or her paycheck each week before the homeowner even receives the check.