A deficiency judgment is a financial ruling made by a court ordering a borrower to pay the difference between the amount of a loan that was paid off and the actual loan amount. In other words, when a borrower pays off a loan that is less than what they originally borrowed from a lender, a deficiency judgment is issued by the court in order to compensate the lender for the unpaid remainder.
When a Deficiency Judgment Is Issued
A deficiency judgment may be issued in a few different scenarios. For example, when a borrower has guaranteed a loan backed by real property (a home or piece of land, for example) and has not paid off the entire loan amount, the lender may ask the court to issue a deficiency judgment. Other scenarios in which a deficiency judgment may be issued include situations in which the borrower has declared bankruptcy, or in which foreclosure was needed to recover some of the unpaid loan amount.
Implications of a Deficiency Judgment
When a court issues a deficiency judgment, the amount deducted from the original loan balance becomes a personal debt of the borrower, and creditors can then pursue collections to recover the amount. Additionally, any remaining balance can now be reported to the credit bureaus and can remain on the borrower’s credit report for up to seven years. The implications of a deficiency judgment can be severe, so it’s important to understand when and how a creditor can pursue one.