U.S. District Judge Charles A. Pannell granted a one-year extension to July 2013, The Atlanta Journal-Constitution reported.
The extension gives state officials more time to prepare for a scheduled review by a court-appointed monitor. The state, in a 2010 agreement with the U.S. Department of Justice, had committed to making sweeping improvements in mental health treatment.
The judge vowed to come down hard on the state if it fails to meet the deadline.
"I'm going to give them just as much rope as I think they need and then we're going to have a hanging party if they don't comply," Pannell told a lawyer for mental health advocacy groups that opposed the extension.
The changes are being made following a federal investigation into Georgia's mental hospitals, and stories by The Journal-Constitution that found dozens of psychiatric hospital patients had died from abuse or neglect.
State officials have been forming community mental health teams aimed at helping mentally ill patients to stay on medications, adapt to the community and stay out of hospitals, jails or homelessness.
But the teams are not in place, nor are they up to standards, lawyer Mark Cohen, who represents the state's behavioral health department, told Pannell.
Georgia is nearing the halfway point in the five-year agreement with the court and with the Justice Department. The state has released hundreds of patients from the mental health hospitals and agreed to spend at least $70 million a year to house and treat an estimated 9,000 mentally ill people in need of assistance, said Tom Wilson, spokesman for the state Department of Behavioral Health and Developmental disabilities.