After the Short Sale: What is a Deficiency Judgement?

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For homeowners who have been struggling to make their mortgage payments along with other monthly living expenses, filing for bankruptcy is the best way to either wipe out or reorganize debt that’s become overwhelming.

When filing for bankruptcy, many homeowners give their homes up to the foreclosure process so they can move to more affordable housing.

Another option that’s available to distressed homeowners (whether filing for bankruptcy or not) is to sell the home via short sale. In order to get your lender to agree to a short sale, you’ll have to provide them with proof that you’ve experienced a significant change in life circumstances. For example: job loss, mandatory job relocation, divorce, death of a spouse or disability, to name a few.

Many people believe that selling their home through a short sale will look better on their credit report versus having their lender foreclose and sell via Sheriff’s Sale. The truth is that bankruptcies, foreclosures and short sales are all going to appear on your credit report and none of them are going to do your credit score any favors. At least not immediately.

However, if you sell your house through a short sale, it is possible for it to have a bit less of an impact on your credit score if you can get your lender to report the debt as ‘paid.’ Often, lenders will report short sale transactions as ‘settled,’ which indicates a deficiency, which will knock more points off your credit score.

What exactly is a ‘deficiency’ and how is it going to affect me?

You may have heard the term ‘deficiency’ thrown around a lot when referring to foreclosures and/or short sales.

Essentially, when you sell your home via short sale, you (as long as your lender agrees) accept a purchase price that is less than you still owe the bank. The difference between how much you owe and the short sale purchase price is called the deficiency.

Example: You owe $190,000 on your mortgage. Your home sells at short sale for $140,000. The $50,000 difference is the deficiency.

The reason it is important to be aware of the deficiency amount is because lenders in New Jersey are legally entitled to seek repayment of that amount from you – the original borrower.

As you can imagine, after falling behind on your bills, meeting with your bankruptcy attorney to discuss your options, opting for a short sale, and (finally!) breathing a sigh of relief when your house sells – it can be more than a little disheartening to discover that you still owe $50,000. For a home that you are no longer living in, and no longer own.

Here’s the good news: even though New Jersey does not prohibit deficiency judgements, most lenders do not pursue them. To err on the side of caution, however, have your attorney negotiate a release of liability from your lender. This must be in writing so that it will hold up in court.

If your lender isn’t keen on the idea of signing a written release, it may be possible to sway them by negotiating a small fee in exchange for the release. This will make your lender feel as though they are getting at least a small payment, and will allow them to avoid expensive court proceedings that would be required for them to sue you for the deficiency. With a release of liability in hand, you’ll be able to relax and move on after your short sale is completed.

Image credit: Diana Parkhouse

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2 Responses to After the Short Sale: What is a Deficiency Judgement?

  1. Pingback: Mortgage Servicer vs Investor: What’s the Difference? | Veitengruber Law

  2. Pingback: Avoiding the Short Sale Deficiency: What are My Options? | Veitengruber Law

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