deficiency judgment n. a judgment for an amount not covered by the value of security put up for a loan or installment payments. In most states the party owed money can only get a deficiency judgment if he/she chooses to file a suit for judicial foreclosure instead of just foreclosing on real property. Some states allow a deficiency action after foreclosure on the mortgage or deed of trust. The right to a deficiency judgment is often written into a lease or installment contract on a vehicle. There is a danger that the sale of a repossessed vehicle will be at a wholesale price or to a friend at a sheriff’s sale or auction, leaving the debtor holding the bag for the difference between the sale price and remainder due on the lease or contract.

What is a Deficiency Judgment?

A deficiency judgment is the difference between what you owe on your loan and what your creditor receives when reselling your vehicle. A creditor who has followed the proper procedures for repossession and sale is generally allowed to sue you for a deficiency judgment to collect the loan balance. If your creditor has committed a breach of the peace, the creditor may lose the right to collect a deficiency judgment. If you are sued, you will be notified of a court date. You should attend the hearing because it may be your only opportunity to raise legal defenses you may have. An attorney will be able to advise you as to whether you have grounds to contest a deficiency judgment.

Foreclosing on Opportunity: State Laws and Mortgage Credit

Foreclosure laws govern the rights of borrowers and lenders when borrowers default on mortgages. In states with laws favoring the borrower, the supply of mortgage credit may decrease because lenders face higher costs. To examine the laws’ effects, I compare approved mortgage applications in census tracts that border each other but are located in different states. Using a regression-discontinuity design and semiparametric estimation methods, I find that loan sizes are 3% to 7% smaller in defaulter-friendly states; this result suggests that defaulter-friendly laws impose material costs on borrowers at the time of loan origination.