Evaluation of Liability: Can you Walk Away?

Many borrowers are contemplating or attempting to sell their homes through a short sale transaction.  The reason is they cannot afford their mortgage payments, and they owe more on their loan balance than what their house is worth in today’s current market.  However, borrowers worry that they will be sued for a deficiency judgment by their lender if they complete the short sale process.

So just what is your liability to the lender if you sell your home in a short sale and just walk away after the closing? If the lender approves the short sale, then most of the time you as the borrower can just walk away, especially if you do not have any assets.

Furthermore, most lenders know that the borrower does not have the money to pay a judgment so it would cost them more to try and sue for a deficiency judgment after a foreclosure. Also, since the borrower no longer resides at the property, it is difficult to find the borrower to serve them so lenders don’t waste their time and resources pursuing deficiency judgments in most cases. Not all states enforce deficiency judgments either so to be sure you should seek advice from your attorney before deciding to do a short sale transaction.

Contact Lender First

If you do decide to sell your home in a short sale transaction, you should contact your lender first to make sure the property qualifies.  Your attorney or Realtor can help you get together the necessary paperwork that the lender will want to review before making their determination. It is smart to start the short sale process before you get an offer from a qualified buyer so that you can shorten up the time process and offer the home for sale at a pre-approved listing price. Since short sales take as long as 90 days or more to get approved, this way your buyer will not get frustrated and walk away since they know that the lender has already approved the sale price.

Federal Tax Liability

Under The Mortgage Forgiveness Debt Relief Act of 2007, taxpayers are not liable for federal taxes on the discharge of debt on their principal residence or debt reduced through a mortgage modification or restructure or foreclosure.  The Act applies for debt forgiven for tax years 2007, 2008 and 2009 at the moment.

Other situations where cancellation of debt is not taxable include:

• Bankruptcy debts that are discharged are not considered taxable income.
• Insolvency when your total debts are more than the fair market value of your assets.
• Certain farm debts: The rules regarding farmers are complex and the assistance of a tax professional is recommend to determine qualification.
• Non-recourse loans where the lenders only remedy in case of default is to repossess the property that is being financed or used as collateral.

• If you may be facing foreclosure or already in the process, Consult Your Case for Free with a local certified Foreclosure Attorney to see your best options you have available to avoid Foreclosure.