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DEFICIENCY JUDGMENT: THE ELEPHANT IN THE ROOM

"Deficiency Judgment.": what is it - and how can you avoid it?:

The elephant in the room when it comes to short sales and foreclosures is "Deficiency Judgment." Deficiency Judgment is a judgment for the amount owed less that amount received via a sale, short sale, deed-in-lieu of foreclosure or foreclosure. Each state has separate laws dealing with them so, on this page and site, all reference(s) to "Deficiency Judgment" will reference California. Note that I am not an attorney and all information on this page and site are not to be construed nor intended as a replacement for legal and/or tax advice.

In some successful short sales, it is possible to negotiate a full satisfaction of the lien, including a waiver of the right to pursue the borrower for that the deficient amount, no promissory note, and no financial contribution. There are lenders that will give up the right to pursuit a deficiency judgment against the homeowner - but this is not automatic, even if the lien holder agrees to release the lien for a set amount. To complete a short sale, the lender(s) must relinquish their lien(s) on the property, but they don't have to agree to not pursue the borrower for deficiency judgment(s), which could be hundreds of thousands of dollars. (I only use a very experienced law firm to negotiate my short sales: they are experts at parsing the language in short sale approval letters, which are drawn up by attorneys: another reason to call us.) There are some lenders that, as a rule, don't allow a short sale without reserving the right to go after the seller for the amount the home is sold short for (deficiency judgment). You have too much at stake to not have all the facts before beginning the sales process, whether it is a regular sale or a short sale: take the time to speak with your legal and tax expert and your bank.

(Click here for an example of what a short sale approval letter looks like where the lender has agreed to not pursue a deficiency judgment, is not requesting a contribution from the seller, and is requesting the seller sign a promissory note: this allows the borrower to get a fresh start so to speak. There are many short sales that close in which, due to the inexperience of the negotiator (typically an agent), leaves the borrower (seller) in what is sometimes a worse position than if they had not sold their home in a short sale at all.)

An interesting question was posed during one of our homeowner workshops: does having a loan modification void the protection afforded Purchase Money Mortgage (original loan(s) against a property). Click here for a thread at ExpertLaw.com that discusses just this subject. Bottom line: consult an attorney with any questions about your mortgage (and NEVER use someone other than a law firm to negotiate for you in a short sale). Realtors are licensed to practice real estate, not law and taxation.

Reasons to Avoid Foreclosure:

  • Many current and prospective employers run credit checks: a foreclosure can put a current position in jeopardy. Also, foreclosure is one of the top items that will put a potential new hire in jeopardy.
  • Security clearances, government positions, military and law enforcement, banking, financial services: many employers reconsider security clearances and jobs positions should one be foreclosed on.
  • You could end up with a much higher tax liability in a foreclosure than could result in a properly negotiated short sale since, in most cases, cancelled debt will be higher.
  • Credit: it will be much tougher - and take much longer - to buy a home with a foreclosure on ones record.
  • You may end up with a Deficiency Judgment (the bank may pursue you for the amount you owe less what they received at auction).

Articles of Note:

Here are articles and websites dealing with short sales, mortgage fraud, loan modification, and deficiency judgment that we found very informative:

Orange County homeowner options: Clark Group: Coldwell Banker: Preventing Foreclosure

As of October, 2019, over 10.8% of Orange County homeowners are 'underwater' on their home: their loan balance(s) are greater than the value of their home - and 8% of all homes on the market are considered a distress sale. The Clark Group works with many homeowners on reviewing their options: with so many Orange County homeowners owing more on their home than it is currently valued at, we find that timely, accurate information is most important so that one can make an informed decision. Unfortuneately, for many, their choices become limited by the banks' lack of progress of a loan modification or principal reduction request - and the banks have begun foreclosure proceedings.
(Click here for a chart showing the California Foreclosure Process.)

There are many options available - over a dozen - but not every option may be right for you. We are very experienced at working with Orange County homeowners in distress. If you have missed, or anticipate missing, mortgage payments, the Clark Group can help. Call the Clark Group at 949-285-1207: all information will be held in the strictest of confidence.

More Free Orange County Homeowner Solution Workshops Being Planned:

Not able to attend one of our workshops? Call Bruce Clark at 949-285-1207, email us, or sign-up for our mailing list for notification of all upcoming events, to reserve a seat at one of our free homeowner workshops, or to set-up a private consultation. Always seek legal counsel and a tax opinion before attempting to pursue a short sale, or modify a home loan. A real estate agent cannot give you legal or tax advice.

Wise Words

"Big men and big personalities make mistakes and admit them. It is the little man who is afraid to admit he has been wrong"

- Dr. Maxwell Maltz

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