If collateral sale yields $80,000 and the debt balance is $120,000, what is the deficiency balance?

• A. $120,000
• B. $80,000
• C. $40,000
• D. $0

Answer: (C)

Deficiency balance is the shortfall remaining after the collateral is liquidated to cover the loan. It’s calculated by subtracting the sale proceeds from the debt balance. Here, the debt is 120,000 and the collateral sells for 80,000, so the deficiency is 40,000. This means the borrower would owe 40,000 if the loan is recourse and the lender pursues a deficiency judgment. If the sale had covered the debt or exceeded it, the deficiency would be zero.