Legal Definitions - deficiency

A deficiency, in a legal and financial context, refers to the unpaid balance of a debt that remains after a creditor has sold the assets that were used to secure the loan. It signifies the amount by which the proceeds from the sale of collateral fall short of the total amount owed. More broadly, it can also refer to an insufficient amount or shortage in fulfilling a legal or financial obligation, such as an underpayment of taxes.

• Example 1: Car Loan Repossession

  Sarah took out a loan to buy a car. After losing her job, she couldn't make the monthly payments, leading the lender to repossess the vehicle. At the time of repossession, Sarah still owed $20,000 on the loan. The lender then sold the car at auction for $15,000.

  How it illustrates the term: The $5,000 difference ($20,000 owed minus $15,000 sale price) is the deficiency. Sarah would still be legally responsible for paying this $5,000 to the lender, even though the car has been sold.

• Example 2: Business Loan with Equipment Collateral

  A small manufacturing company secured a business loan for $150,000, using its specialized machinery as collateral. When the company faced severe financial difficulties, the lender seized and sold the machinery. Due to its highly specialized nature and a limited market for used equipment, the machinery only fetched $100,000 at auction.

  How it illustrates the term: The $50,000 that remains unpaid ($150,000 original debt minus $100,000 sale proceeds) constitutes the deficiency. The lender may pursue the company or any personal guarantors for this outstanding amount.

• Example 3: Tax Underpayment

  Mark filed his annual income tax return, calculating his tax liability as $8,000 and submitting that amount. Later, during a routine audit, the tax authorities determined that his actual tax liability was $9,500 due to an error in reporting certain investment income.

  How it illustrates the term: The $1,500 difference ($9,500 actual liability minus $8,000 paid) is a tax deficiency. Mark would be required to pay this additional amount to the tax authorities, potentially along with interest and penalties, because his initial payment was insufficient to cover his full legal tax obligation.