Deficiency Judgment

A judgment against a borrower, endorser, or guarantor for the balance of a debt owed when the security for a loan is insufficient to satisfy the debt. A deficiency occurs when the foreclosure sale of a property produces less than the amount needed to pay the costs and expenses of the action and to satisfy the obligation secured by the foreclosed mortgage. The deficiency is entered as a personal judgment against the original mortgagor and operates as a lien on the judgment debtor’s assets. It is enforceable and collectible in the same manner as any judgment at law. If this judgment proves uncollectible, the lender is probably entitled to claim a bad-debt deduction on the lender’s income taxes. In the case of a corporate mortgage, this would be a bad business debt and may fully offset against ordinary income.

In states where mortgages generally carry a power of sale, creditors must bring a separate action to obtain a deficiency judgment because the jurisdiction of a court is not invoked. If parties agree that the lender can look only to the collateral (the mortgaged property) in the event of a default, they include language to the effect that “this note is without recourse,” which has the effect of preventing a deficiency judgment. In California and other states, the mortgagee cannot recover a deficiency judgment on a purchase-money mortgage; these states have enacted so-called antideficiency legislation.

A purchaser who assumes the seller’s existing mortgage thereby becomes personally liable (along with the seller) for any deficiency. However, when purchasers buy property “subject to” an existing mortgage, they cannot be held personally liable for any deficiency; thus, upon default, the purchaser’s liability would extend only to the loss of the property.