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Can My Lender Pursue A Deficiency Judgment After A Short Sale?

As troubling it is to lose your house to foreclosure, borrowers may still be on the hook for the deficiency amount. It is the difference of what's owed on the home loan and what the bank could sell for at an auction. "Deficiency judgments" can hurt ex-homeowners years after they have lost their property.

It can be an unexpected surprise for anyone who have sold their house through a short sale where the lender agreed to sell the house for less than the mortgage owed.

Vanessa Corey who achieved a short-sale on her Fredericksburg, VA property in 2008 is a true story. Years after she had completed construction to her home in 2004, tragedy struck leading to a legal divorce with her husband and the emergence of the economic recession, pushed her to sell the property through a short-sale.

As a property agent, she assumed the lender had agreed to disregard the difference in amount owed after the short-sale. Late last year, her legal representative produced a letter from her lender with a demand to pay an owed amount of $65,000. As she didn't have the money, she declared bankruptcy.

There are a lot of financial institutions who decline to discuss the topic of 'deficiency judgments'. Correy's financial institution who lent her the money stated that they were targeting more people with deficiencies.

How Do You Avoid A Deficiency Judgment? It depends on which state the homeowner resides in. Other things include if the borrower has a second mortgage or other liens. It can definitely hurt homeowners if they disregarded the issue altogether.

Real-estate attorney, Mr. Zaretsky mentioned that if your financial lender has achieved a judgment on the borrower, they can target you despite of your location. They have the power to ask for your financial records, hold your wages and put you in jail if you continued to turn away from their requests.

Banks can go after deficiency judgments in more than thirty states. The U.S. Foreclosure Network states that Florida, New York and Texas are among these states.

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.

As financial institutions are likely to agree in forgiving the deficiency amount, many ex-homeowners do not know that they are needed to opt for a release. This can be done by having your legal representative demand a release from your financial lender.

Zaretsky says that homeowners should not take things for granted assuming that a deficiency judgment will not return and hit them. He believes that many of these judgments will be pursued over several years to come. It is important to note that these accounts were sold at a loss to various collection firms and third-party investors. These firms would not have purchased these loans if they weren't eager in recovering the amount they paid for them.

Banks or collection firms do not act in obtaining judgments right away. As a strategy, they may act patient and allow debtors to financially improve prior to filing with the legal system. For example, banks have up to five years to file in Florida state. Once judgment is obtained, the bank has up to twenty years to pursue the debt with interest.

Regardless of how small the debt is, banks and collection firms can pursue borrowers. Mr. Varno together with his wife sold their Nashville home in 2004 through a short-sale arrangement once he lost his job. 48 months later in 2008, he was pursued by the 2nd lien holder for $25 K. His defended himself by stating that they had released the title and that did not make him liable anymore.

Unfortunately, that was not the case. The release of the title does not mean that the debt will be extinguished. Due to the diverse variations in state laws, in general, a mortgage responsibility consists of 2 parts. The first part is the collateral in which the pledge is the asset or house. The second part is the promise and agreement to pay back the loan.

Financial institutions may drop the liens to help allow a short-sale. This however does mean that they will terminate the original contractual agreement for the borrower to repay the loan as stated in the promissory notes. After selling the house, the secured debt can evolve into an unsecured debt.

Mr. Zaretsky explained an example about one of his customer who was so happy in achieving a short-sale that he foolishly signed all the documents his property agent gave him. Not knowing what was happening, he had also signed away a statement indicating that he is still owes and acknowledge the debt.

He was unaware that the financial institution could take that document and transform it into a deficiency judgment through the legal system.

Financial institutions are not very trustworthy or may not be acting on your best interest. Zaretsky explained of a separate borrower who was rich and eligible to pay off the debt. However, the financial institution did not reciprocate as they knew they can later come after him for a deficiency judgment.

Property agent Mr. Tolchinsky from Florida, mentioned that banks can sometimes pursue borrowers who abandon their home with the knowledge that they may have money or other assets they can pursue.

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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