How are Deficiency Judgments treated in Bankruptcy?

In the event that a borrower defaults on mortgage payments, a lender may commence foreclosure on the property. Consequently, the lender may sell the property to recover the unpaid loan of the borrower. However, if the property is sold for less than the outstanding debt balance, then the lender can pursue deficiency judgment against the borrower and if the lender obtains it, he or she may explore remedies like levying the borrower’s bank accounts, wage garnishment and the like. The documentation on the loan will indicate whether a lender will be able to seek deficiency judgment or not as a result of the borrower’s default. If a loan is recourse, the lender may pursue deficiency judgment but if it is non-recourse, then the lender cannot.

Under bankruptcy law, if a lender is able to obtain deficiency judgment against a borrower who subsequently filed for bankruptcy, as long as the deficiency judgment was handed to the lender before the borrower’s bankruptcy filing, then the judgment is deemed as a secure debt. A deficiency judgment is considered as a judgment lien, so in the event that it an exemption is impaired, then the debtor can avoid it by filing a Motion to Avoid Lien. If the motion is approved by the court, then the deficiency judgment lien will be deemed as an unsecured debt.

Meanwhile, if a lender is pursuing deficiency judgment against a debtor that has filed for bankruptcy and if the deficiency judgment is still pending on the bankruptcy filing date, then the judgment will deemed an unsecured debt. Moreover, because bankruptcy protection triggers an automatic stay, the lender must drop the deficiency judgment action against the debtor.

If your lender has filed a deficiency judgment against you, immediately consult a lawyer so that you will be informed of your rights under the laws of your state.