[A:http://mortgage-foreclosure.org/news/podcast/how-to-avoid-a-deficiency-judgment-after-a-short-sale-feb3-2010.mp3;How To Avoid A Deficiency Judgment After A Short Sale?]As horrible it is to lose your home to foreclosure, ex-homeowners may still be on the bait for the deficiency amount. This is simply the difference of what is owed on the mortgage and what the bank could sell at an auction. “Deficiency judgments” can haunt borrowers, years after they have lost their home.
It can be an unpleasant shock for borrowers who have sold their home via a short sale arrangement where the bank approved selling the property for an amount less than the mortgage debt.
Vanessa Corey who made a short-sale on her Fredericksburg, VA home in April of 2008 is a real life example. After building her house in 2004, unforeseen setbacks which led to a bitter divorce coupled with the economic housing crisis forced her to sell the house through a short-sale arrangement.
As a realtor, she believed that the difference in the amount owed in the loan was forgiven by the lender. Last Nov, she obtained a letter through her attorney showing that she owed the bank $65 k. She had no choice but to file for bankruptcy as she could not afford to pay the bank.
Many lenders refuse to comment regarding the issue of ‘deficiency judgments’. In the case of Corey’s lender, BT&T clearly indicated that they were pursuing more homeowners with deficiencies.
Are You Protected From A Deficiency Judgment? Whether banks can pursue such a feat depends on several factors including what state the borrower lives in. Other factors include whether there is a second mortgage or other liens involved. It can certainly haunt borrowers if they chose to ignore the possibilities of deficiencies.
Mr. Zaretsky, a property lawyer in Palm Beach, Fla said that once your bank has judgment on you, they can pursue you regardless of where you reside. They can demand for your financial records and have your salary taken away or have you jailed if you ignored any contact.
In reference to home foreclosures, lenders can pursue deficiency judgments in more than 30 states. According to the U.S. Foreclosure Network, an organization of mortgage firms, this includes states such as Florida, New York and Texas.
Fortunately in places like Arizona and California, they do not permit ‘deficiency judgments’. The other ten states that do not allow such judgments are Iowa, Alaska, North Dakota, Montana, Pennsylvania, Oregon, Washington, Wisconsin and South Carolina.
Even if banks are willing to disregard the deficiency amount, many homeowners do not know that they are required to ask for a release. To prevent a judgment against yourself, make sure that your lawyer asks your lender for a release.
Zaretsky advised that ex-homeowners should not pretend that a deficiency judgment may not affect them. He predicts that a large amount of these judgments will be worked on for years to come. The reason is that many of these debt accounts were sold at a lower price to many collection companies and 3rd party investors. These companies have the intended goal of recovering their initial investment.
Financial institutions or debt collection companies may sit and wait for borrowers to cure themselves from their financial woes before filing for a judgment. Take for instance in Florida state, financial institutions and debt collection companies can wait up to five years to file. Once judgment is received, the organizations will be granted a time span of up to 2 decades to collect the debt with interest.
Financial institutions and debt collection companies can hunt down ex-homeowners in spite of a minor debt. In 2004, Mr. Varno and his spouse achieved a short-sale arrangement with their property after he was laid off from his job. In 2008, to his surprise, the second lien holder demanded 25 K from him. Mr. Varno explained that they had already released the title thus making him not indebted to the 2nd lien holder.
Disappointingly enough, that is far from the truth. Although the title was released, this will not make the debt vanish. As there are differences in state laws, a regular mortgage contract is split into 2 provisions. The first being the collateral exchange where the property is pledged. The 2nd is the contractual guarantee to pay off the loan.
Banks may let go of liens in order to facilitate a short-sale. Doing so does not mean that the banks will also disregard the borrowers’ contractual promise to pay back the debt which are outlined in the promissory documents. Once the property is sold, the secured debt can change into an unsecured debt.
Zaretsky pointed out to one of his customers who went over the mountain when he got a short-sale. He blindly signed away all the papers that his loan agent had given him with the inclusion of a document that made him still legally responsible for the debt.
According to Zaretsky, he had no idea what was going on. The lender could go to court and convert the confession into a deficiency judgment.
Lenders can also be unreliable. Zaretsky had another client who was willing and financially able to pay off the deficiency but the bank did not bother asking as they reserve the right to pursue the deficiency judgment at a later point.
Larry Tolchinsky, a Florida real estate attorney said, lenders can occasionally come after borrowers who strategically default (or walk away) if they have other remaining assets.
Lenders will investigate if this was a true strategic default by pulling out your credit report. If they discover that you were not behind in all your payments and not in financial distress, they may pursue you.
If you are unsure, it is recommendable to obtain the services of an attorney to make sure that the debt in the short-sale or deed-in-lieu agreement is negotiated away.
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