What is a deficiency judgement

By nature, all short sales will have a deficiency balance. Laws governing the right of the lender to pursue a borrower for the deficiency balance vary state to state. States considered recourse states allow the lender to pursue. Non-recourse states generally prevent this, though some allow pursuit of deficiency though set forth limits on the amount that can be pursued.

If a lender can legally pursue the deficiency and does not specifically waive its right to pursue the deficiency, the borrower is at risk for a deficiency judgment.

Nevada law potentially grants lenders a six year window of time to sue for the deficiency based on breach of contract in contract law, not foreclosure law. Other states may differ.

Borrowers considering a short sale should be aware of this risk and ask every party involved in the process (Realtor, lender, third party, ...) what can and will be done to protect against a deficiency judgment. Consult an attorney in the state where the property resides to determine specific risks.

Once a short sale has been completed, a Chapter 7 bankruptcy is a possible remedy the borrower can use to remove the risk of the deficiency or discharge the judgment itself.