A short sale can be a great solution for a homeowner who is having trouble making his or her mortgage payments. A short sale is when a bank agrees to accept a sale price that is less than the full mortgage amount owed in order to avoid foreclosure. However, homeowners that complete a short sale are often surprised to find out months or even years later that their lender is seeking a deficiency judgment against them.
What is a deficiency judgment? Since the sale price is less than the full amount owed on the mortgage, the difference between the total debt owed and the sale price is known as the deficiency. In some states, the lender can seek a personal judgment against you after the short sale to recover this deficiency amount. If this judgment is entered against you, then the lender may collect this from the borrower by garnishing wages or levying the debtor’s bank account; Florida is one of these states.
The good news is there are ways to avoid a deficiency judgment after a short sale. One of the best methods is to negotiate a full waiver of the lender’s right to seek a deficiency judgment while negotiating the short sale with your mortgage holder. If the lender agrees, then the provision will be included in your short sale agreement. The agreement must state the transaction is in full satisfaction of the debt and that the lender waives its right to the deficiency.
If the lender refuses to waive the deficiency, the debtor may also make a settlement offer for a smaller amount. If a debtor does this, he or she must make sure the payment is included in the HUD-1 settlement statement at the closing of the short sale so it does not appear to be an illegal kickback. A lender is likely to accept a smaller amount because collecting a deficiency debt can be a costly and lengthy process. Many lenders would much rather accept a reduced lump sum than to try and collect the full amount. You may even be able to negotiate a monthly repayment plan for the reduced amount.
The riskier approach is to take the chance that the lender will not bother to actually sue you for the deficiency. After the short sale is completed, the lender will most likely start to call and send letters stating money is still owed. However, without an actual deficiency judgment, the lender cannot freeze bank accounts, garnish wages or place judgment liens on property. A lender must file a lawsuit in order to receive a deficiency judgment.
The final option a debtor has is to file for bankruptcy. A Chapter 7 Bankruptcy will usually discharge the deficiency, which relieves the debtor from having to repay the debt. If the debtor declares a Chapter 13 Bankruptcy, he or she will be required to repay a portion of the debt. If the deficiency judgment is the only debt you owe, it may not be in the debtor’s best interest to declare bankruptcy.
For more information on how to avoid a deficiency judgment after a short sale, contact the Law Office of David M. Goldman PLLC.