Deficiency judgments in Tennessee foreclosure cases can leave homeowners owing money even after losing their property in a foreclosure. So, understanding how these judgments work is important if you're behind in mortgage payments and facing a foreclosure sale. Tennessee foreclosure law allows lenders to pursue a deficiency judgment after both judicial and nonjudicial foreclosures, but state statutes limit the amount to the difference between the total mortgage debt and the home's fair market value when certain conditions are met.
This article explains Tennessee deficiency judgment laws, how courts calculate the deficiency, key deadlines, and options to avoid or reduce a deficiency after foreclosure..
What Is a Deficiency Judgment?
If a property sells at a foreclosure sale for less than the full outstanding mortgage debt, the difference is commonly called a "deficiency balance." Some states allow a foreclosing bank to get a deficiency judgment (a personal judgment) against the borrower for the amount of the deficiency balance.
Once a bank gets a deficiency judgment, it is entitled to use common collections methods to collect the deficiency from the borrower by, for example, garnishing wages or levying a bank account.
Are Deficiency Judgments After a Home Foreclosure Allowed in All the States?
Some states have anti-deficiency laws prohibiting deficiency judgments.
Are Deficiency Judgments Allowed in Tennessee?
Yes, Tennessee law allows deficiency judgments, subject to limitations.
What Happens After Foreclosure in Tennessee?
If you take out a loan to buy a home in Tennessee, the lender will likely require you to sign a promissory note and a deed of trust. The promissory note contains your promise to repay the loan. On the other hand, the deed of trust gives the lender bank the ability to sell the home through a process called "foreclosure" if you don't make the loan payments or violate the terms of the deal in some other way.
Foreclosures in Tennessee may be judicial or nonjudicial.
- How judicial foreclosures work in Tennessee. With a judicial foreclosure, the bank files a lawsuit against you in court.
- How nonjudicial foreclosures work in Tennessee. Nonjudicial foreclosures don’t involve the court system. In a nonjudicial foreclosure, the bank has to finish certain out-of-court steps, which are set out in the state statutes. Most foreclosures in Tennessee are nonjudicial.
With either type of foreclosure, the process ends with a foreclosure sale. At a foreclosure sale, the bank typically bids on the home using a “credit bid.” Basically, the bank gets a credit up to the amount the borrower owes. Sometimes, the bank bids the full amount of the borrower's debt; sometimes, it bids less.
Whoever makes the highest bid at the sale, either the bank (which makes a credit bid) or a third party (who bids cash), becomes the property's new owner. If the final bid is less than what's owed on the mortgage loan, the sale results in a deficiency.
You might have to pay a deficiency judgment after either type of foreclosure in Tennessee.
How Deficiency Judgments Work in Tennessee
Deficiency judgments are allowed with both nonjudicial and judicial foreclosures in Tennessee. (Tenn. Code § 35-5-117 (2025).)
How to Calculate a Mortgage Deficiency in a Tennessee Foreclosure
Unless the borrower can demonstrate fraud, collusion, misconduct, or irregularities in the sale process, the deficiency amount typically represents the difference between the borrower's total debt and the price obtained at the foreclosure sale. (Tenn. Code § 35-5-117 (2025).)
Suppose Terry fails to make the monthly payments on her home, and the bank forecloses. At the foreclosure sale, Terry’s home was sold to the foreclosing bank, which made a credit bid of $300,000. Unfortunately, Terry owed the bank $350,000 on her home loan. The deficiency is $50,000.
When Tennessee Law Limits the Deficiency Amount
Under Tennessee law, the foreclosing bank is usually entitled to recover the total amount of the deficiency. But, if the borrower can prove that the home sold for materially less than its fair market value at the foreclosure sale, then the deficiency judgment is limited to the total debt minus the property's fair market value at the time of the sale. (Tenn. Code § 35-5-117 (2025).)
Statute of Limitations for Deficiency Judgments in Tennessee
Generally, the bank has to seek a deficiency judgment no later than two years after the trustee's or foreclosure sale, excluding any time in which a petition for bankruptcy is pending. (Tenn. Code § 35-5-117(d)(1) (2025).)
How Can I Avoid a Deficiency Judgment in Tennessee?
A few ways to potentially avoid a deficiency judgment are:
- Negotiating a settlement of a deficiency. If you lost your home to a foreclosure sale, which resulted in a deficiency, you might be able to work out a settlement with the bank to accept less than the full deficiency amount and forgive the rest. Generally, however, the IRS considers forgiven debt as taxable income, subject to some exceptions.
- Completing a short sale or deed in lieu of foreclosure (before the sale) in which the bank waives the deficiency. If you owe more than your home is worth, the bank might be willing to let you complete a short sale or deed in lieu of foreclosure. But it’s fairly common for banks to insist borrowers pay all or some of the deficiency after one of these transactions or for the bank to reserve the right to go after you for a deficiency judgment. If you're doing a short sale or deed in lieu for the sole purpose of avoiding a deficiency judgment, make sure that the bank agrees in writing to give up its right to the deficiency. Again, there could be tax consequences if the bank forgives the deficiency.
- Filing for bankruptcy. You might be able to eliminate or reduce your liability for a deficiency if you file for bankruptcy.
Getting Help With Foreclosure
To learn about potential defenses to the foreclosure, find out whether you'll likely have to pay a deficiency judgment, or get information about how to reduce a deficiency judgment by proving that the home sold for materially less than its fair market value, consider talking to a local foreclosure attorney.
If you need help applying for a way to avoid a foreclosure, like by completing a modification, short sale, or deed in lieu of foreclosure, consider talking to a HUD-approved housing counselor.