After a collateral sale, how is the deficiency amount determined?

• A. Proceeds from the sale are applied to the debt, and any remaining balance may be pursued as a deficiency under the contract and law.
• B. The original debt amount is charged regardless of sale proceeds.
• C. Only interest is considered in calculating deficiency.
• D. The creditor may never pursue deficiency.

Answer: (A)

When a collateral sale happens, the proceeds are first used to reduce the outstanding debt. If the sale doesn’t generate enough cash to pay everything owed, the shortfall is the deficiency. The lender can pursue that deficiency under the loan agreement and applicable law, including any costs, interest, or fees that the contract allows. This reflects how collateral is meant to secure repayment: the sale converts the collateral into cash to apply to the debt, and any remaining balance can be sought as a deficiency if permitted.

For example, if the debt is $100,000 and the sale brings in $80,000, the deficiency would be $20,000 (subject to any allowable costs or interest per the contract). The other options don’t fit because they either ignore applying sale proceeds to the debt, focus only on interest, or state that deficiency can never be pursued.