Bankruptcy & Deficiency Judgments After Foreclosure

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 liability for mortgage deficiencies. Read on to learn more about how bankruptcy can get rid of a deficiency judgment after foreclosure.

What Is a Mortgage Deficiency?

When you take out a mortgage loan, you typically sign two 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 balance. Depending on state law and the terms of your mortgage, your lender may be able to sue you to collect its deficiency balance.

Can the Lender Collect 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.

For instance, some states don't permit deficiency judgments after foreclosure. Generally, whether your mortgage lender can sue you for a deficiency will depend on:

• the laws of your state
• the terms of your mortgage loan
• the number of mortgages on your house, and
• whether you used the mortgage proceeds to purchase the house (this rule applies in California).

Learn more about whether your lender can sue you for a deficiency judgment after foreclosure.

Bankruptcy Can Eliminate a Deficiency Judgment

If your lender sues you and you don't respond to the lawsuit, the lender can obtain a deficiency judgment against you by default. With the judgment, the lender can potentially garnish your wages or go after your assets to collect its debt. But like many other dischargeable 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 will be treated as an unsecured debt like a credit card obligation or medical bill. 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 liability. It does not automatically get rid of liens on your property. If your lender obtains a lien on any of your other assets before bankruptcy, you will have to file a motion with the court to try to remove it. The court will only agree to remove a lien that prevents you from protecting the amount of equity you're entitled to under your state's exemption laws.

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. 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.