A short sale is a good option for homeowners facing difficulty in paying off their mortgage debts. The lender agrees to take the sale price at which the house is sold, even if it is less than the mortgage amount, allowing the homeowner to avoid foreclosure altogether. However, there are situations where the lender seeks a short sale deficiency judgment against the homeowner several months or years later, leaving them surprised as to why they still have to make mortgage payments after everything has been settled.
What is a Short Sale Deficiency Judgment?
The amount received after a short sale is usually less than the total mortgage debt. This difference between the selling price and the total debt is referred to as deficiency. For example, if you owe your lender $150,000 on the mortgage, but the short sale price of your home is $100,000, the difference of $50,000 is the deficiency.
The lender may pursue a personal judgment against you to recover the deficiency amount after the short sale. Typically, once a deficiency judgment has been made, the lender may collect the outstanding amount from you by levying your bank account, garnishing your wages, or through any other means permissible by law.
How you can avoid a Short Sale Deficiency Judgment
If your lender is seeking a deficiency judgment, there are several ways you can avoid paying back the deficiency, such as:
- Make an offer to Settle the Deficiency: Before the short sale, you can make a deal with your lender to settle for a lower amount of deficiency to avoid problems after the transaction has been completed. Since filing for a deficiency judgment and collection of debt is a costly and lengthy process, your lender may agree with your offer to save time, money, and energy. You may even negotiate to pay the deficiency in manageable installments over time.
- Waiving off the right to pursue a Deficiency Judgment: When you are working with your lender to get approval for the short sale, you can request them to rescind their right to pursue a deficiency judgment. If they agree to it, make sure to include this provision in the short sale agreement. It must be explicitly stated in the agreement that the transaction fully satisfies the debt amount and the lender revokes their right to seek the deficiency.
- Declare Bankruptcy: Another way to avoid a deficiency judgment is to file bankruptcy to reduce or eliminate your debt. You may file Chapter 13 bankruptcy to pay only a portion of the total amount. You may also consider filing Chapter 7 bankruptcy to completely discharge the deficiency.
If your home is on the verge of being foreclosed and you want to negotiate a short sale agreement with your lender, you should hire a foreclosure defense attorney to help you with the process. The attorney will also assist you with negotiating about a short sale deficiency judgment with your lender. Contact Covert & Covert, LLP at (630) 717-2783 or online to schedule a free consultation today. We have offices in Schaumburg, Illinois, Warrenville, and Naperville.