A deficiency claim is a claim by a lender for the balance owed on a loan after a foreclosure or repossession and liquidation of the collateral. For example, if the balance owed on a home loan is $200,000, and a lender forecloses and sells the house for $150,000, the lender has a claim for the deficiency – or $50,000. Unfortunately, many people did not realize when they signed their loan documents that they would owe the full balance of the loan even if the lender took the house back. Do lenders really pursue borrowers for deficiency claims? After all, a foreclosure is usually a good sign the borrower has no extra money. Yes, they do, but not in every case. Lawsuits for deficiencies are fairly cookie cutter so it takes relatively minimal expenses to file them and, in most cases, win. The lender can then hold onto the judgment until the borrower has income and accounts to garnish, even if it is a few years down the road. Importantly, even in short sales and deeds in lieu of foreclosure, the lender can still pursue deficiency claims unless they have agreed to waive or limit the claim.
In a few states, lenders are not allowed to pursue deficiency claims after foreclosure. They are called “non-recourse” states (see a list here). In Georgia, lenders have to take an additional step before pursuing a deficiency claim. The lender has to file a confirmation action in Superior Court within 30 days of the foreclosure and present evidence to the Judge that the property was sold for its “true market value” (in reality, this is not what it would sell for in normal market conditions) (Code Section 44-14-161). These actions are also normally cookie-cutter cases, rarely contested, and the lender virtually always wins. Nevertheless, the lender does not confirm every foreclosure so there is a good sense of finality when the 30 days has passed with no confirmation filing. One important caveat to that is that the lender will likely issue a 1099 tax form for any deficiency they “write off,” and in turn that can lead to federal and state income tax liability.
If you are facing a foreclosure, it is wise to meet with a good Bankruptcy lawyer in your area even if you do not want to keep the house and even if you do not believe Bankruptcy is an option. Bankruptcy lawyers are usually among the most experienced lawyers in dealing with foreclosure and debt problems outside of Bankruptcy.