Legal Definitions - deficiency suit

A deficiency suit is a legal action taken by a lender to recover the remaining balance of a mortgage debt after the property securing the loan has been sold through a foreclosure process, and the proceeds from that sale were not enough to cover the entire outstanding debt.

Essentially, if a property is foreclosed upon and sold, but the sale price doesn't fully pay off the mortgage, the lender may sue the original borrower for the difference between the total debt owed and the amount recovered from the sale.

• Example 1: Residential Property Foreclosure

  Imagine John purchased a home with a $400,000 mortgage. After a few years, he lost his job and could no longer make his mortgage payments, leading the bank to foreclose on his property. At the foreclosure auction, the house sold for $350,000. After deducting the costs associated with the sale (such as legal fees and auction expenses), the bank only netted $330,000. Since John still owed $400,000, there is a $70,000 difference ($400,000 - $330,000). The bank could then file a deficiency suit against John to recover this $70,000, which represents the unpaid portion of the original mortgage debt.

• Example 2: Commercial Real Estate Default

  A company, "Tech Innovations LLC," secured a $2 million mortgage to buy its corporate office building. Due to a significant downturn in its industry, Tech Innovations defaulted on its loan. The lender initiated foreclosure proceedings, and the building was eventually sold at auction for $1.7 million. After all foreclosure expenses were paid, the lender received $1.6 million from the sale. Because the original mortgage debt was $2 million, there is a $400,000 shortfall. To recover this outstanding amount, the lender could pursue a deficiency suit against Tech Innovations LLC, and potentially against any individuals who personally guaranteed the loan.