Understanding Deficiency Judgments and How to Avoid Them

17 October 2025

Getting behind on a mortgage or facing foreclosure is stressful enough. But what if, after the lender sells your home, you still owe money? That unexpected curveball is known as a deficiency judgment. For many homeowners, it can feel like getting kicked while you're already down.

But don't worry — you're not powerless. In this article, we're diving deep into what deficiency judgments are, how they work, and (most importantly) how you can avoid them. Let’s break it all down together in simple terms.

What Is a Deficiency Judgment?

Let’s start at the beginning: A deficiency judgment is a legal ruling that allows a lender to go after the borrower for the remaining loan balance after a foreclosure if the home sells for less than what's owed.

Think of it like this: You took out a $300,000 mortgage, but the bank sold your foreclosed home for $240,000. There’s still $60,000 unpaid. That $60k is the deficiency. The court can issue a judgment against you requiring you to pay that amount.

Here's a Real-Life Example:

Say you couldn’t keep up with mortgage payments. The bank forecloses and sells your house. You might think that’s the end of it — but boom — you get a letter saying you owe tens of thousands more. That’s the deficiency judgment coming into play.

When Does a Deficiency Judgment Occur?

Deficiency judgments don’t happen with every foreclosure, but they can under certain conditions. Here’s when they typically pop up:

- The foreclosure sale doesn't cover your full mortgage debt
- You live in a state that allows deficiency judgments
- Your lender decides to pursue legal action afterward

Some states automatically allow lenders to file for the balance you owe after foreclosure. Others outright ban the practice. A few allow it only in non-judicial foreclosures (i.e., ones that don’t go through the court system).

States That Allow vs. Prohibit Deficiency Judgments

Let’s break this down quickly:

- States that often ALLOW deficiency judgments: Florida, Georgia, Illinois, New York, and Ohio (but it’s case-by-case)
- States that generally PROHIBIT them: California, Arizona, North Carolina, and Texas

So depending on where you live, you might be safe — or you might need to take action to protect yourself.

How Do Lenders Collect Deficiency Judgments?

Once a court grants a deficiency judgment, it becomes like any other debt you legally owe. That means lenders can:

- Garnish your wages
- Put liens on other property you own
- Freeze or seize funds in your bank account

Sound scary? Yeah, it’s not ideal. But knowing the rules helps you play smarter.

Can You Reduce or Challenge the Amount?

Absolutely.

If you think the home sold for way less than its actual market value, you can challenge the amount of the deficiency. Courts don’t just rubber-stamp every lender’s request. If they sold your $280,000 home for $200,000 just to get rid of it, you might have grounds to fight back.

You might also negotiate with the lender to settle for less — sometimes significantly less — especially if your financial situation is dire.

How to Avoid a Deficiency Judgment Altogether

Here’s where we turn the tide. Let’s talk about how to dodge deficiency judgments in the first place. It’s not just about legal knowledge — it’s about strategy.

1. Ask for a Waiver in a Short Sale

If you’re considering a short sale (selling your home for less than the mortgage balance), don’t just take any deal. Negotiate!

Ask the lender to waive the deficiency in writing as part of the agreement. Many will say yes — they’d rather get something than nothing.

Some banks even have standard language in short sale agreements that prevent deficiency judgments. But never assume. Always double-check the paperwork.

2. Opt for a Deed in Lieu of Foreclosure

Another option is a deed in lieu of foreclosure. This is when you voluntarily hand over the property to the lender to avoid foreclosure.

Often, lenders will agree to cancel any remaining debt — but again, make sure that’s in writing. Otherwise, you might still be on the hook.

It’s like giving the keys back and saying, “We’re even, right?” — and getting a handshake (and a signature) that confirms it.

3. Know Your State Laws

Knowledge really is power here. Some state laws will have your back, making it illegal for lenders to pursue a deficiency judgment after foreclosure or a short sale.

Search your state’s foreclosure laws or talk to a local real estate attorney. It’s worth an hour or two of your time to avoid owing tens of thousands of dollars.

4. File for Bankruptcy (As a Last Resort)

Filing for Chapter 7 bankruptcy can wipe out deficiencies — and almost all other unsecured debt.

Now, we're not saying this is the go-to plan. Bankruptcy comes with serious long-term consequences for your credit. But if you’ve been hit hard financially and have no clear way out, it’s worth considering.

A deficiency judgment is unsecured debt, similar to credit cards or medical bills. So in many cases, bankruptcy will make it vanish.

Does a Deficiency Judgment Affect Your Credit?

Unfortunately, yes.

If the lender gets a deficiency judgment, it’ll show up on your credit report as a court judgment (kind of like a collections case). That can tank your score — often even more than a foreclosure alone.

The judgment itself can stay on your record for up to seven years, although its impact fades over time.

But here’s the kicker: It’s not just about your credit score. A judgment can be enforced through wage garnishment or liens, which can cause real financial pain.

The Difference Between Recourse and Non-Recourse Loans

This is where things get interesting.

Some mortgages are recourse loans — meaning the lender can pursue you personally for the unpaid debt. Others are non-recourse, where the lender can only take the collateral (your house) and nothing more.

If You Have a Non-Recourse Loan...

You’re golden. After foreclosure, that’s it. No deficiency. No judgment. No calls from collection agencies.

But if you’ve got a recourse loan, watch out. You're fair game for the lender.

Most residential loans are recourse loans — unless you’re in a non-recourse state or got a certain type of loan (like a purchase money mortgage in California).

Tips to Protect Yourself from Deficiency Judgments

Let’s wrap it up with some bulletproof strategies you can use right now.

✔️ Get Professional Help

Real estate attorneys and foreclosure specialists are your best friends here. They can review your loan agreement, negotiate short sale terms, and handle legal challenges if needed.

✔️ Don’t Ignore Notices from Your Lender

Don’t stuff those letters in a drawer. If you’re behind on mortgage payments, open every envelope. Call your lender. Figure out your options before it’s too late.

✔️ Stay in the Loop During Foreclosure

If foreclosure is happening, attend the court hearings (if applicable in your state). Challenge the property valuation. Argue for a fair deal.

✔️ Consider Selling Before Foreclosure

If you can bail out before the foreclosure process starts, you can usually get a better deal — and more importantly, control over the outcome.

Final Thoughts

Dealing with foreclosure or mortgage trouble can feel like walking through a minefield blindfolded. But understanding how deficiency judgments work is like flipping on the lights. Now you can see where things could go wrong — and how to stay safe.

Remember, even if you’re facing tough financial times, you’ve got options. From negotiating a waiver during a short sale to challenging a judgment in court, or even leaning on bankruptcy if you must — there are ways to protect yourself.

So take a breath, do your homework, and take action. Your financial future is worth fighting for.