Many homeowners who have gone through a short sale are surprised months or years down the line when the lender seeks a deficiency judgment against them. In the loan documents a borrower signs, lenders typically reserve the right to seek a deficiency judgment against the borrower in the event it suffers a loss as a result of a foreclosure or short sale. In short, if a lender successfully obtains a deficiency judgment, it has the right to pursue all legal collection efforts against a borrower, including garnishing wages and levying on bank accounts and other property, in order to recoup the loss it suffered.
But My Lender Agreed to the Short Sale
Many homeowners and some real estate agents think that because a lender agrees to a short sale, it has also waived its right to seek a deficiency judgment. A short sale is a negotiated remedy whereby the lender agrees to accept less than what is owed on the mortgage in order to assist a financially strapped homeowner in selling the property. When a lender approves a short sale, the homeowner and the lender typically sign a short sale agreement which sets forth the details of their agreement. If the short sale agreement does not specifically state that the lender is waiving its right to seek a deficiency judgment, a homeowner must be aware that at some point in the future he may be facing a deficiency judgment lawsuit.
Can The Lender Be Forced to Waive Its Right to Seek a Deficiency Judgment?
In non-recourse states, lenders are prohibited from seeking a deficiency judgment. Moreover, some states have enacted legislation which prohibits lenders from seeking deficiency judgments on certain types of loans.
In recourse states and states which do not have anti-deficiency laws in place, a borrower may use a lender’s wrongful conduct as leverage to force it to waive its right to seek a deficiency judgment. If a lender has violated RESPA, TILA, or other consumer protection laws or engaged in any other illegal conduct, it may be more inclined to approve a short sale and waive its right to seek a deficiency judgment.
What About Bankruptcy?
If a lender has filed a lawsuit to obtain a deficiency judgment, a borrower can file a Chapter 7 bankruptcy to stop the lawsuit. Because any debt owed on the mortgage after a short sale is considered an unsecured debt, it would be completely wiped out in a Chapter 7 bankruptcy.
Getting Legal Help
Before agreeing to the terms of a short sale, it’s best to seek the advice of an experienced foreclosure attorney. Your attorney can tell you whether deficiency judgments are authorized in your state and advise you of any other consequences of a short sale.
