Many people who come to me are facing a foreclosure or repossession. They typically ask me to explain what a deficiency balance is and how it will affect them during this process.

A deficiency balance is the difference between what the property was sold for and the outstanding debt due under the loan. This happens when a secured property is sold for less than the amount due under the loan. Any remaining balance is known as the deficiency balance.

The following are examples of deficiency balances from foreclosure, short sales and car repossessions:

Deficiency after Foreclosure

Foreclosure is common in today’s economy. For instance, if you owe $300,000 under a delinquent home mortgage with all of your costs and fees, and the bank sells the home at a foreclosure sale for $280,000, the remaining $20,000 is the deficiency balance. It is unusual for a mortgage company to collect a deficiency balance after a residential foreclosure.

Deficiency after Short Sale

If you owe the bank $350,000 under a delinquent home mortgage (including costs and fees), and the bank approves a short sale for $250,000, the remaining $100,000 represents the deficiency balance under the short sale. In many (but not all) cases, the mortgage company forgives the deficiency. There may be income tax consequences.

Deficiency after Car Repossession

If your car loan is $13,000 and your car is repossessed or voluntarily returned and is sold at auction for $10,000, then the deficiency balance is $3,000. In most cases, a car finance company will try to collect a deficiency balance.

Hopefully the above gave you some insight into what a deficiency balance is and how it impacts you. You need an experienced bankruptcy attorney to explain your options. Remember, there is life after bankruptcy. Contact me today to find out how I can help you get a fresh start.