A deficiency judgment is a filing from the bank against a homeowner or borrower that has gone through foreclosure. The filing is for the amount of money that the bank lost because of the foreclosure. This fee is calculated by taking the unpaid loan balance and subtracting the property value from that amount. The unpaid loan balance includes unpaid interest, any fees the bank advanced like taxes and insurance, attorney fees, and costs such as filing fees associated with the foreclosure.

Many people ask, “How can I avoid a deficiency judgment?” and the answer is this: The only way to avoid a deficiency judgment is if the property were sold at a foreclosure sale. However, because most properties are not sold at the foreclosure sale, the bank ends up stuck with the property.  That is where this gets interesting…

Once the bank ends up with property, the bank needs to have a hearing before the judge within a set period of time . At that hearing, called a valuation hearing, the bank needs to provide evidence of the diminished value of the property. Here, the borrower is free to show that the bank improperly valued the property and that there is no deficiency due or a smaller outstanding amount.

Should the court determine that a deficiency is due, the court will enter a judgment against the borrower, which is good for 10 years and can also be renewed by the bank for an additional 10 years. Frequently, banks sell these judgments in bulk to hedge funds or investors that include collection agencies and law firms that specialize in collecting on consumer debt.