Deficiency Balance

As many people painfully still remember from 2008, many homeowners found that their homes’ values had dropped below the amount of their mortgages, making them “upside down,” and in a host of cases, subject to default. (Like...if they stopped paying their mortgage, they lost the home and all the equity they'd invested in it.)

When these homes were foreclosed and sold, it left a deficiency balance, meaning that the collateral for the original loan was insufficient to cover the loan principal. In some cases, the deficiency balance was written off by the banks. In other cases, the lender may press for recovery of that deficiency balance, resorting to legal means, which also affects the borrower’s credit score.

The deficiency balance principle is what 28% APR credit cards and loan sharks use as their bread and butter business model.