What is a Deficiency Claim?

A deficiency claim is that portion of a claim secured by a lien on property that exceeds the value of the property. In this case, the creditor is granted a secured interest up to the value of its collateral, while any excess amount of its claim over the value of the collateral is classified as an unsecured claim. This unsecured portion of the claim is the deficiency claim. This is a particular problem for a secured creditor when the court assigns a low value to the creditor’s collateral, since this means that more of its claim is shifted into the unsecured claims classification.

Characteristics of a Deficiency Claim

The primary characteristics of a deficiency claim are as follows:

Arises from secured debt. A deficiency claim originates when a borrower defaults on a secured debt (e.g., a mortgage or car loan) and the collateral is sold (via foreclosure, repossession, or bankruptcy proceedings) for less than the outstanding loan balance.
There is an unsecured portion of the debt. After the collateral is sold, any remaining unpaid balance becomes an unsecured claim. This "unsecured" portion is the deficiency claim, as it is no longer tied to the collateral.
Subject to bankruptcy classification. In bankruptcy, deficiency claims are treated as general unsecured claims, ranking below secured claims but often equal to other unsecured debts like credit card balances or medical bills. The creditor holding a deficiency claim may only receive partial repayment, depending on the debtor’s available assets and the type of bankruptcy filed.
Based on the sale of collateral. The deficiency amount is calculated as the difference between the total amount owed and the proceeds from the sale of the collateral.
May be dischargeable. In many cases, deficiency claims are dischargeable in bankruptcy, meaning the debtor is no longer obligated to pay the remaining balance after the bankruptcy process is complete.
Subject to deficiency laws. In some jurisdictions, anti-deficiency laws may limit or eliminate the creditor’s ability to pursue a deficiency claim, especially for certain types of loans like mortgages.
May include fees and interest. A deficiency claim may include not only the unpaid loan balance but also any accrued interest, late fees, or other charges stipulated in the loan agreement.
Can be challenged. The debtor or the bankruptcy trustee may challenge the amount of the deficiency claim, particularly if the collateral was sold for less than its fair market value.

Example of a Deficiency Claim

Elvis owns a Rolls Royce, on which there is a $150,000 car loan from Big Bank. Elvis declares bankruptcy, so Big Bank seizes the car and sells it for $125,000. This leaves a deficiency of $25,000. Big Bank files a deficiency claim of $25,000, which is classified by the bankruptcy court as an unsecured debt.