How to Deal with Creditors Collecting Deficiency Judgment

Taking out a loan always has risks. Ideally, these risks are both low and manageable. As long as your income or assets remain stable, you should easily be able to repay the loan. However, this idealized version of taking out a loan isn’t always what happens in reality. In fact, many people find themselves unable to repay their loans, and this is especially problematic when they are dealing with a secured loan.

Secured loans are those which require some kind of collateral to take out. This may be property, such as a home or business, or a vehicle or other valuable asset. These items are not handed over at the time of taking out the loan as a deposit might be, but rather, they are used as a promise. In other words, if someone defaults on their loan, they will owe the lender this asset, and potentially a whole lot more.

First – What is a Deficiency Judgment?

Simply put, a deficiency judgment is when a court rules that a lender may collect on the collateral offered up by a debtor during borrowing, plus whatever further amount is deemed appropriate. This means that, by collecting deficiency judgments against debtors, creditors can seize that valuable asset, plus additional funds to make up the balance that wasn’t covered by the seizure and sale of that property or item.

Deficiency Judgment Examples – What You Might Face

Why might collecting a deficiency judgment happen? An example might be a house worth $250,000 at the time of sale, purchased for that amount with a loan, and a down payment of $25,000. The borrower might be able to repay $25,000 of that loan, then defaults. The remaining $200,000 must then be recovered. The potential problem? The home’s resale value may only be $185,000.

That $15,000 outstanding debt still has to be paid. Since the collateral property has already been sold, that means that lenders have to pursue recovery of the balance from the debtor.

This may be legally prohibited if you are experiencing foreclosure, so be sure to speak to a legal and financial professional if you are uncertain whether your debt is eligible for collection.

What Does Collecting Deficiency Judgments Look Like?

It is important to note that collecting deficiency judgments doesn’t happen automatically. They can only be collected if the lender makes a motion to do so. Otherwise, the debt that is left over after the sale of a property or other collateral is disregarded.

This might sound great – after all, why wouldn’t you want to be off the hook for repaying your outstanding debt from a large loan? The issue that many people don’t understand is that if this debt is dismissed, it is legally considered income. That means it’s taxed, even though you didn’t actually receive that amount.

So, what happens if your lender does decide to pursue the remaining amount owed via debt recovery? For many people, it means you will be contacted once or twice by the lender themselves asking you to repay the amount. Typically this will be presented as a single repayment option, but many lenders may offer that single sum repayment option alongside gradual repayment options.

Some lenders don’t offer these outreach and recovery efforts. They will simply hand over the outstanding debt to a collection agency. Regardless of whether they attempt to recover this debt themselves or get a third party involved, debtors are legally obligated to repay this amount. Otherwise, legal ramifications might occur.

What efforts might your lender or their partner collection agency take to secure repayment of your debt? Some of the most common include:

• Wage garnishment – This involves seizing a predetermined amount from your regular paychecks.
• Levying of your bank accounts – This involves the seizure of money directly from your bank account(s). (If you have one or more retirement accounts, you aren’t likely to have these funds seized. These accounts are typically exempt from levies. Your lender may suggest that you do so, but you are not legally obligated to!)
• Applying liens to other property or valuable items – What is a lien? This is a claim put against a valuable piece of property other than the piece initially offered as collateral. If your lender has reason to believe that applying a lien to an additional valuable asset of yours will ensure that you repay your outstanding debt, they can pursue a court order to enforce this.

No matter what method they choose, your lender is well within their rights, collecting deficiency judgment against you.  

What to Do in the Event of Deficiency Judgment Collection

So, you’ve landed in the crosshairs of a lender who is eligible for collecting deficiency judgment – what do you do now?

First, wait and see if your lender is actually going to pursue repayment. Sometimes, though they are legally allowed to do so, they won’t waste time – especially if the remaining amount after the sale of your collateral property isn’t very high. Remember, if they don’t push you to repay that amount, you likely won’t ever have to.

If your creditor is indeed intent on pursuing repayment, speak to a legal professional promptly. The pursuit of this repayment – whether you are capable of paying it or not – is legal action. You need sound legal advice.

For some, bankruptcy might be a solid option. It is one way to wipe out your debt and could be the smartest choice for those who have a significant amount of it. Again, this is something that should be discussed with a legal professional who can help you make the right choice for you.

If you’re facing lenders collecting deficiency judgments against you, talk to the legal experts at Van Horn Law Group. They can help guide you through the next steps, regardless of what they might be in your individual situation.