A deficiency balance on foreclosure—also known as a mortgage deficiency or deficiency balance—occurs when a home or property is foreclosed on and the sale proceeds are not sufficient to pay off the mortgage. The remaining balance owed on the mortgage is a deficiency balance or mortgage deficiency.

And if a mortgage lender (bank or mortgagee) files a lawsuit against a mortgagor (debtor) who defaulted on a mortgage, the lender may obtain a court judgment known as a deficiency judgment. With this judgment the lender can try to garnish the debtor’s wages or go after the debtor’s other assets for payment or satisfaction of the deficiency judgment.

A deficiency judgment may be discharged in Chapter 7 or Chapter 13 bankruptcy.

Laws vary from state to state and a state’s laws and the terms of the mortgage may determine whether the mortgage lender will pursue a mortgagor who defaulted on a mortgage for any deficiency balance.

In Arizona, if a property is foreclosed and the sale does not cover the outstanding mortgage balance, the lender may pursue a deficiency judgment against the borrower for the remaining balance, known as a deficiency balance. However, Arizona law (Arizona Revised Statutes Sections 33-729, 33-814) provides certain protections for borrowers. For instance, anti-deficiency laws may prevent lenders from seeking deficiency judgments if the property is 2.5 acres or less and utilized as a single one-family or single two-family dwelling. Additionally, if the loan was a purchase money mortgage (used to buy the property), the borrower may also be protected from a deficiency judgment. If a lender does obtain a deficiency judgment, they may attempt to collect by garnishing wages or seizing other assets of the debtor. Debtors have the option to discharge the deficiency judgment in a Chapter 7 or Chapter 13 bankruptcy. It's important for borrowers facing foreclosure to consult with an attorney to understand their rights and obligations under Arizona law.