If your mortgage lender forecloses on your house but can’t sell it for enough money to pay off its loan, you may still be on the hook for the remaining balance (called a deficiency). Luckily, filing for bankruptcy relief can eliminate your personal liability for mortgage deficiencies. Read on to learn more about how bankruptcy can get rid of deficiency judgments after foreclosure.
(To learn more about the foreclosure process, visit our Foreclosure area.)
What Is a Mortgage Deficiency?
When you take out a mortgage loan, you typically sign two important documents. A note promising to pay back the debt and a security agreement (or deed of trust) that pledges your house as collateral for the loan.
If you default on your mortgage, your lender can foreclose on your house and sell it to recover its loan. If the foreclosure sale proceeds are not enough to pay off your mortgage balance, the unpaid portion is called a deficiency. Depending on state law and the terms of your mortgage, your lender may be able to sue you to collect its deficiency balance.
What Happens If You Have a Deficiency After Foreclosure?
Just because your foreclosure sale didn’t bring in enough money to pay off your mortgage doesn’t mean that your lender can automatically come after you for the rest. Deficiency laws are complex and can vary significantly from state to state. Certain states do not permit deficiency judgments after foreclosure or only allow lenders a single collection action (foreclosure or a lawsuit, but not both).
Generally, whether your mortgage lender can sue you for a deficiency depends on:
- the laws of your state
- the terms of your mortgage loan
- whether you had one or multiple mortgages on your house, and
- whether you used the mortgage proceeds to purchase the house.
To learn more about whether your lender can sue you for a deficiency after foreclosure, see Nolo's section on deficiency judgments and foreclosure.
Bankruptcy Can Eliminate Your Personal Liability for a Deficiency Judgment
If your lender sues you and you don’t do anything, it can obtain a deficiency judgment against you. After getting a judgment, your lender can potentially garnish your wages or go after your personal assets to collect its debt. But like most debts, you can eliminate your liability for a deficiency judgment by filing for Chapter 7 or Chapter 13 bankruptcy.
Chapter 7 Bankruptcy
In most cases, when you file for Chapter 7 bankruptcy, your lender’s deficiency judgment is treated as an unsecured debt like your credit card obligations or medical bills. This means that when you receive your discharge, your lender can no longer come after you to collect its debt. (Learn more about how Chapter 7 bankruptcy works.)
However, keep in mind that your discharge only eliminates your personal liability. It does not automatically get rid of liens on your property. If your lender obtains a lien on any of your other assets prior to bankruptcy, you will have to file a motion with the court to try to remove it.
Chapter 13 Bankruptcy
Similarly, unless your lender placed a lien on any of your assets, its deficiency judgment is only an unsecured debt in your Chapter 13 bankruptcy. This means that your lender will likely receive little or nothing through your Chapter 13 repayment plan. When you complete all of your plan payments, the deficiency judgment will be discharged along with your other dischargeable debts. (Get details on what debts are paid through your Chapter 13 repayment plan.)