Foreclosure & Deficiency Judgment Advice
When a homeowner has missed several mortgage payments, the bank may take steps to recover the loan by taking possession of the property in a foreclosure. In some cases, in order to mitigate the situation, the bank may approve a short sale of the property, resulting in the bank accepting less than what is owed. If this happens, it may pursue a deficiency judgment against the homeowner for the difference between what is recovered and what is actually owed. The bank might also pursue a deficiency judgment against the homeowner even after a foreclosure.
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Short Sale and Deficiency Judgment
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A short sale can be seen as a win-win-win for the bank, the homeowner and the new property buyer. The bank wins because it is able to get bad debt off its books, the homeowner is relieved of the burden of a huge debt that he can no longer pay and the new buyer of the home gets a good deal on a house.
The homeowner can initiate the short sale process if she finds a buyer or works with a real estate agent to find a buyer. The bank would have specific forms or a short sale package to be filled out. The bank would want to know the reason for nonpayment and the cause of any financial hardship that the owner may be experiencing. The bank will get an appraisal of the house to determine its current market value and subsequently accept or deny the offer of the buyer. Once it is accepted, the new buyer can go ahead and buy the house at a short sale--a value lower than what is owed but comparable to the current market value.
The bank reserves the right to go after the homeowner for the difference between what is owed and the short sale value. This is usually done using a deficiency judgment.
Getting Around a Deficiency Judgment
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Although the bank has the right to pursue a deficiency judgment especially after a short sale or foreclosure, most times banks do not take this option. It also depends on what kind of loan the homeowner received and the language in the original loan. Some mortgage contracts specifically contain language that says a deficiency judgment will be pursued in the case of a default or foreclosure. However, if it might cost more to pursue said judgment, the bank might take a write-off or report the shortage to the homeowner and the IRS as income to the homeowner on a 1099. In that case, the homeowner will need to prove to the IRS when filing his tax returns that he was insolvent so that he is not taxed for this "income." The homeowner should consult a tax professional on how to do this.
If a deficiency judgment is issued, the homeowner should consult an attorney for ways of getting around it based on her particular circumstances. Laws vary from state to state, and this will dictate what course of action to take. It is possible to fight this in court and get an exemption, in which case the homeowner would not be required to pay or even file for bankruptcy.
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