DEALING WITH DEFICIENCY
When you house is sold for less money than what is owed on
your mortgage, this difference is called a Deficiency Judgment. A deficiency
can occur on a foreclosure, a deed in lieu and on a short sale. Many people
think that because they have given their house back to the bank or because
their house went into foreclosure that they are done with the bank. That is
not necessarily true. On all recourse loans, the lender has the right to come
after the homeowner for that difference. In the case of foreclosure, deed in lieu and short sale,
the lender has two choices. The first is to send you a 1099C showing the
difference between what you owed and what the house sold for as income to
you. And the second is to come after you to collect the difference. If this is your primary residence or you have lived in
this property for 2 out of the last 5 years, a 1099C can be a very good
thing. Because of HR3648, Debt Relief Forgiveness Act, $500,000 of the 1099C
($250,000 for each person on title) can be written off. That means if you
meet all qualifications, you probably will not pay any tax on the monies
reported on the 1099C. If you receive the 1099C, bring it to your accountant
when you file your taxes and he will know how to handle it. If this is not
your primary residence but an investment property, there are ways to handle
this debt also. Discuss this with your accountant. HR3648 is in effect until
the end of 2012. If you lender does not send you a 1099C, that means they
are keeping their options open to try to collect from you in the future. They
may sell your note to another investor. If you are turned over to a very
aggressive collection agency, they might even take you to court and get a
deficiency judgment from the judge. If granted, the judge gets to set the
interest rate which could be as high as 12% - 14%. If the deficiency is
granted by the court, they can now garnish your wages and state income tax
return. Obviously, this can get pretty ugly for you. With foreclosure and probably with deed in lieu, you will
not be able to negotiate a solution to the deficiency judgment with your
lender in advance. This will be a wait and see situation for you hanging over
your head for years to come. A short sale is different. As part of the short
sale terms, the deficiency can be negotiated. When negotiating your short
sale, I am working for you, not your lender. My goal is to get your house
sold with the very best terms for you. In most case, I have gotten the lender
to agree not to try to collect any money from the homeowner in the future.
The deficiency was written off in full. Mortgage was recorded as Paid in
Full. In cases where the lender would not write off the deficiency, I have
gotten them to take small cash settlement at closing to pay it off in full.
And in some cases, they have agreed to take an unsecured, 0% interest,
promissory note for all or part of the deficiency with a small monthly
payment for a period of 5 – 20 years. In negotiating the deficiency judgment with your lender,
remember that you always have the final approval of the short sale when you
use me as your negotiator. My success rate in negotiating short sales is
about 90%. And, in most cases, the short sale was negotiated with no
deficiency judgment to the homeowner. I am good at what I do and I am always
working for you. |