What is a deficiency judgment?

A deficiency judgment is a court's ruling that allows a creditor to recover the remaining balance owed by a borrower after a foreclosure sale has taken place. When a property is sold in a foreclosure, if the sale price does not cover the total amount owed on the mortgage—including any fees and costs associated with the foreclosure—the lender can pursue a deficiency judgment against the borrower for that remaining balance.

This legal action often involves a court proceeding, where the lender must prove that the borrower owes a debt that remains unpaid after the sale. The result is that the lender can potentially garnish wages, attach bank accounts, or place liens on other properties owned by the borrower to recover the owed amount.

The other options do not appropriately represent what a deficiency judgment is. For instance, a penalty for late mortgage payments refers to late fees incurred due to missing payment deadlines and does not involve a court decision. A type of foreclosure summary does not accurately depict the nature of a deficiency judgment, as the latter relates to the borrower’s obligations post-foreclosure. Lastly, a reduction in loan balance describes a decrease in the amount owed rather than the legal consequences of not being able to cover the full debt after the foreclosure sale.