A deficiency arises when a secured creditor sells its collateral and the money from the sell is not enough to pay off the debt in full. Consider these scenarios:
Jane defaulted on her mortgage. She owed $100,000, and the house was sold for $80,000 at the foreclosure sale. The $20,000 difference is called a deficiency, and Jane still owes the money even though she no longer owns the house.
John owned a Honda. It was repossessed when he defaulted in payments. He owed $10,000 and the car sold for $6,000 at auction. The $4,000 difference is a deficiency, and he still owes the money even though the car is gone.
The deficiency amount is still a personal debt owed by the debtor to the creditor after the collateral is sold, and the creditor may sue the debtor in an attempt to collect. A deficiency is a main reason that people who lose their home or car typically need to file bankruptcy in order to clean up the entire debt. Some people believe that losing the property is all that can happen if they do not make loan payments, but that is not true.
Bankruptcy can wipe out these deficiencies and should be considered any time a person loses property to a creditor. A bankruptcy attorney will be able to determine what effect filing bankruptcy would have on any deficiencies owed.