It is important for homeowners to mentally prepare for the fact that if their home is sold as a result of foreclosure, they may remain financially liable for a foreclosure deficiency balance. Understanding this reality can help homeowners to decide whether pursuing a bankruptcy in order to save their home is the best option under their unique circumstances.
When a borrower defaults on a mortgage, the lender may initiate foreclosure proceedings to sell the property and recoup the unpaid loan amount. Ideally, the property’s sale price should be enough to satisfy the mortgage debt. However, in many cases, the property sells for less than the remaining balance of the loan, especially in declining real estate markets or distressed sales. The difference between the outstanding loan amount and the foreclosure sale price is called the deficiency balance.
Deficiency judgements in foreclosure
In Tennessee, lenders can pursue a deficiency judgment to collect the remaining balance from the borrower. If granted, the lender can use various methods to collect the amount, such as garnishing wages, seizing bank accounts or placing liens on other property.
How bankruptcy can address a deficiency balance
If a borrower cannot pay the deficiency balance, filing for bankruptcy may provide relief. In Chapter 7 bankruptcy, the deficiency balance can often be discharged, meaning the borrower is no longer legally obligated to pay the debt. In Chapter 13 bankruptcy, the deficiency may be included in a repayment plan, allowing the borrower to pay off a portion of the debt over time, with the remaining balance discharged after completing the plan.
A foreclosure deficiency balance can add financial strain to an already stressful situation. If you are facing foreclosure, seeking legal guidance from an experienced bankruptcy attorney can help you navigate your legal options and find the best solution to address the risk of a potential deficiency balance.
