Deficiency balance collection occurs after a lender repossesses or forecloses on secured property because the borrower missed payments, and the sale of that property fails to fully cover the loan balance and related recovery costs. The resulting shortfall, called the deficiency balance, is the amount the borrower still owes the lender.
To illustrate, suppose you owe $15,000 on a car loan. If the car is repossessed and sold for $10,000 after adding $1,000 in repossession fees, you may still owe $6,000. Lenders usually must sell collateral in a “commercially reasonable” way, such as via auction, to maximize recovery.
The collection process involves lenders or collection agencies seeking payment for this deficiency balance. They may send notices, call debtors, or initiate lawsuits to obtain a deficiency judgment, which enables more forceful collection actions like wage garnishment.
State laws critically affect deficiency balance collection. Some states are “non-recourse” for mortgages, preventing lenders from pursuing deficiency judgments after foreclosure. Others allow full or limited deficiency recoveries. For auto loans, lenders commonly have recourse across states, allowing collection efforts for deficiencies.
If facing deficiency balance collection, understand your state’s laws and demand a clear breakdown of amounts owed and fees. Negotiating a settlement or consulting a legal expert can help, especially if you suspect improper sale practices or have trouble paying. Ignoring the debt risks lawsuits and further credit damage.
Keep in mind, forgiven deficiency debt may be taxable income per IRS rules, with exceptions especially for primary residences. Refer to IRS Publication 4681 for details on foreclosure and debt cancellation.
For more on related topics, see Deficiency Judgment, Repossession, and Foreclosure.
Sources:
- Investopedia, “What Is a Deficiency Judgment?” https://www.investopedia.com/terms/d/deficiency-judgment.asp
- Nolo, “Can a Lender Collect a Deficiency After Car Repossession?” https://www.nolo.com/legal-encyclopedia/car-repossession-deficiency.html
- IRS Publication 4681, “Foreclosure and Debt Relief” https://www.irs.gov/pub/irs-pdf/p4681.pdf