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How Does Bankruptcy Deal with a Deficiency Judgment?

Once a court grants a deficiency judgment to the creditor, the creditor may be able to take various actions to collect payment. The creditor can put a lien on your bank account or garnish your wages, depending on state laws.

How long does the lender have to obtain a deficiency judgment? That depends on the statute of limitations on the deficiency judgment. As the name implies, a statute of limitations creates a time limit. Again, state laws vary and a statute of limitations in one state may be different from another. For example, Florida’s statute of limitations on a deficiency judgment is five years. So, from the date of a short sale, the statute runs for five years, and the lender has that timeframe in which to file a lawsuit to collect the debt.

A bankruptcy first deals with a deficiency judgment by putting a stop to the collection efforts through an automatic stay. If you had a lien on your bank account or wage garnishment occurring, these legal actions cease.

Bankruptcy can prevent a deficiency judgment

Then if you file a Chapter 7 bankruptcy, the trustee liquidates your non-exempt assets and uses the proceeds to pay off debts. After the trustee pays as much as possible, bankruptcy discharges the remaining debts. The deficiency judgment receives a discharge along with any other debts and you get a fresh start.

Filing bankruptcy before the lender sues to obtain a deficiency judgment also stops the legal action. The lender must pursue a lawsuit to obtain a deficiency judgment and the automatic stay prevents lawsuits. The bankruptcy also wipes out any deficiency after home liquidation as part of the Chapter 7 bankruptcy.

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