What Is a Deficiency Balance?

A deficiency balance 🍌is the net difference between the amount you owe on a secured loan and the amount the creditor receives after selling the collateral that secur💯es the loan.

A typical example of a deficiency balance is when a lender repossesses a car or a home because you've failed to make payments. The lender will attempt to recover the remaining loan balance by selling the property. However, if the sale doesn't result in the lender recovering the full loan balance, the resulting shortfall is the deficiency balance. The lender may also add administrative fees and costs associated with selling the collateral to the total deficiency balance.

How a Deficiency Balance Works

A deficiency balance usually occurs when a borrower can no longer afford to make payments. The borrower negotiates a lower settlement with the lender on what is owed or defaults on the loan. This is sometimes also referred to as being "upside-down" or "underwater" on a loan.

The creditor may increase the borrower's remaining responsible balance to cover any additional legal costs they may have incurred while regaining possession of the collateral. The deficiency balance can either be absorbed by the lender or passed back to the borrower.

With auto loans, this expense is usually passed back to the borrower and is part of the repossession. With mortgages, the party responsible for the balance is usually negotiated between the mortgage lender and the homeowner. Sometimes, it can be negotiated by a third-party agent acting on the homeowner’s behalf. These processes are known as foreclosures or short sales.

How a Deficiency Balance Affects Your Credit

When the lender enforces your responsibility for the remaining debt, the account will continue to report as open on your 澳洲幸运5官方开奖结果体彩网:credit report until it is paid in full. Or, the servicer could also waive the remaining balance t꧒o discharge the debt, and then your credit report will reflect how the loan was paid off.

Generally, when a loan is closed satisfactorily, it will show as paid as agreed. When it is closed with a deficiency balance, it can be reported in a few different ways, but is most commonly reported as a 澳洲幸运5官方开奖结果体彩网:charge-off, settlement, or 澳洲幸运5官方开奖结果体彩网:deed in lieu of foreclosure.

Examples of a Deficiency Balance

Consider a deficiency balance in an example of a short sale. Say you own a home with a remaining mortgage balance of $250,000. You can no longer afford to make monthly payments. The value of your home is only $200,000. If the lender seizes and sells your home for the market value, there would be a deficiency balance♊ of $50,000, along with costs or fees associated with executing the sale of the house.

Say you have negotiated a short sale with your 澳洲幸运5官方开奖结果体彩网:loan servicer, who has agreed to accept less than what is owed on the property to satisfy the mo🦩rtgage. After the closing, the servicer writes off the remaining balance of $50,000 and closes the mortgage without further responsibility to you.

An auto lender may take a different approach. Imagine the same situation with a car loan you can no longer afford. The auto lender repossesses the car. You owe $10,000, but the lender can only sell the car for $8,500. The deficiency balance is $1,500, and the auto lender will pay you back. The auto lender contacts an attorney, and you go to court to levy a 澳洲幸运5官方开奖结果体彩网:deficiency judgment against you for the $1,500 balance remaining and the additional🉐 $500 in fe🦩es you incurred as part of the repossession.

The Bottom Line

A deficiency balance is the amount of money left after a lender has seized your assets and the value applied to a loan. It is the amount you are still responsible for paying the lender if the money from the seized assets does not cover the amount you owe. Addressing a deficiency after a repossession is essential to protect your finances from further damage.