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Real property

deficiency judgment on foreclosure

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 Texas, 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 amount. Texas Property Code Section 51.003 allows for deficiency judgments following foreclosure sales. However, the lender must file a lawsuit to obtain a deficiency judgment within two years after the foreclosure sale. The amount of the deficiency is limited to the difference between the fair market value of the property at the time of the sale and the remaining debt. Texas law also provides certain protections for borrowers, such as homestead exemptions that may limit the ability of lenders to collect on deficiency judgments. If a borrower files for Chapter 7 or Chapter 13 bankruptcy, the deficiency judgment may be discharged, subject to the bankruptcy court's rules and proceedings.

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