Deficiency Judgment and Garnishing of Wages

Deficiency judgments and wage garnishment are possible after repossessions or foreclosures. In both situations, the mortgage company or credit agency takes possession of property because the debtor failed to make payments. The debt collector then sells the property at a private sale or auction, with proceeds applied to the loan. If the proceeds are not enough to pay off the loan, the debtor receives a statement for a so-called "deficiency balance." In some cases the deficiency balance can lead to a court judgment and wage garnishment.

Considerations

Deficiency balances are possible for several reasons. Many people owe more on their property than it is worth, making deficiency balances virtually a certainty during foreclosure or repossession. For example, cars usually depreciate faster than the debtor can pay off the loan. At the time of repossession the debtor's car may have a value of $5,000, yet the loan balance is $9,500. Low down payments are a contributing factor to this. Homes can quickly decline in value because of a housing crisis or major recession. It's possible that a house purchased at an inflated price at the peak of a housing boom could lose up to half its value in a recession.

Effects

Banks and credit agencies usually demand that debtors pay deficiency balances. However, some state laws forbid collection of deficiency balances on foreclosures. In states where it is legal, some debtors face bills for tens of thousands of dollars. Even the short sale of a house can lead to a deficiency balance. A short sale allows a debtor to sell a house for less than the balance on the loan. The transaction requires the cooperation of the lender, but some lenders still hold the homeowner responsible for a deficiency balance. In 2010, CNN reported about one woman who sold her house in a short sale but received a bill from the lender for $65,000.

Lawsuits

Debtors who refuse to pay deficiency balances could face civil lawsuits. Winning the cases is usually easy for lenders, with judges granting court judgments for the full amount. If the debtor fails to pay or make payment arrangements, the lender can request wage garnishment. Garnishment forces employees to send a percentage of the debtor's paycheck to the debt collector each paycheck to satisfy the debt. The percentage varies by the state but usually is around 25 percent.

Solutions

Deficiency balances are unsecured debts like credit cards and are sometimes negotiable through debt settlement. Settlement allows resolution of a debt, usually for less than the full balance. The settlement amount depends on what the debt collector is willing to accept. People negotiating deficiency judgments should start low by offering around 20 percent and keep negotiating until they have a deal that is affordable. Some debt collectors may also offer payment plans and agree to end garnishment as part of the agreement. Bankruptcy is a final option for ending garnishment because of a deficiency judgment.