Not sure what a deficiency balance is? Not sure how to protect yourself from dealing with the outcome of a deficiency balance? It’s important to educate yourself and protect yourself the best you can since a deficiency balance can wreak havoc on your credit.

What is a Deficiency Balance?

A deficiency balance is the amount of money still owed after a home foreclosure. For example, if you owe $200,000 on your mortgage, but your home only sells for $100,000 after foreclosure, the remaining balance of $100,000 is the deficiency balance.

Misconceptions About Deficiency Balances and Foreclosures

Many people think that once their home is in foreclosure and they move out, they are off the hook. They do not realize that if there is a deficiency balance, they will need to pay that off or risk more financial troubles. You can’t just walk away from a foreclosure, leaving an unpaid balance on a mortgage.

State-Specific Variations on Deficiency Balance Laws

Some states have instituted anti-deficiency laws that protect certain types of borrowers from deficiency balance judgments. You can use these links to check out state-specific foreclosure laws and foreclosure non-recourse state laws. Make sure you completely understand the anti-deficiency laws (which are usually very specific as to which situations are protected and which are not) before daring to walk away from such a debt.

What Happens If You Have a Deficiency Balance After a Foreclosure?

It will help your case if you contact the lender to offer to settle or refinance the deficiency balance. If you ignore the deficiency balance and the lender’s attempts to collect the debt, you will send the signal that you are unwilling to pay, which may result in a lawsuit. If you lose such a lawsuit, you may end up facing the following consequences:

• Wage Garnishing – Many states allow lenders who win such lawsuits to garnish your wages, which can mean you may lose up to 25% straight out of your paycheck each pay period, something you definitely want to avoid.
• Liens - If you own other property, the lien will make it such that when you sell the property, you have to pay the lender what you owe on the deficiency balance before you get to access any proceeds from the sale of that property.
• Damaged Credit – An unresolved deficiency balance will significantly affect your credit score in a negative way, affecting your ability to secure credit in the future.
• Loss of Savings – The judge may order you to pay off the debt through the seizure of another bank account in which you have money.

What Can You do if You Owe a Deficiency Balance?

If you find yourself in this position and you can’t repay the entire debt, you will want to negotiate a settlement or refinance. In most cases, you’ll be better off with a settlement, which will most likely be for less than any type of repayment plan the lender will negotiate. You’ll have to pay the settlement as a lump sum and make sure the lender gives you a letter that states you have now have a “charge off” or “settlement” status, and that the letter marks the charge off or settlement as “paid”.

Protect Your Credit

While it’s tempting to think only about today and now, you’ll need to start rebuilding your credit record. Submit a copy of charge off or settlement letter (stating the delinquency balance is paid) to your credit bureau if the delinquency balance still shows up on your credit record. You want to show future creditors that you were responsible with the debt.

What About Debt Settlement Companies?

You’ll want to consider debt settlement companies with care, because many lenders will not work with debt settlement companies. This means you may end up paying the debt settlement company a bunch of money and then find out the lender won’t take deals from them anyway. Get advice from a nonprofit, accredited credit counseling company, and then approach the lender yourself. Only trust a debt settlement company to help you deal with this issue if you can’t handle it yourself and you’ve ascertained the lender will accept dealings with the company you’ve chosen.

Is it Ever Wise Not to Pay a Delinquency Balance?

The only time you’ll want to walk away from a delinquency balance is if you are judgment proof from responsibility for delinquency balances. Make sure this is your legal status before you take on this risk.