Deficiency judgments are relatively rare these days, but they do occur from time to time, and they do leave debtors in a great deal of distress and financial hardship. One reason for claiming a deficiency judgment is when a creditor feels that a debtor is in a position to pay – this can often be misguided as the creditor often has no idea as to the financial situation of the debtor. So what is a deficiency judgment, you ask?
When an asset is repossessed, or a home foreclosed on, because the debtor is in arrears, the asset (or home) is generally sold at auction and the monies raised used to pay off the debt. In most cases, the money raised does not cover the outstanding debt leaving the creditor with a loss on the whole transaction. The creditor can sue for that loss (or deficiency) and, should they win, they will be awarded a deficiency judgment for the outstanding balance. The creditor can then seek wage or bank garnishments.
For the debtor, they have a choice. If they are aware of the deficiency hearing, they can dispute their ability to pay. They can also choose to pay, although for most debtors, this is generally out of the question. Their final option is to seek relief through the bankruptcy court.
Because the debt is an unsecured loan, bankruptcy law allows deficiency judgments to be discharged along with any others debts listed by the petitioner. One of the reasons most creditors don’t follow up with deficiency judgments is because they can be expensive to obtain, more so if the debtor then seeks relief through the bankruptcy courts.
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