FORECLOSURE DEFICIENCY JUDGMENT or SHORT SALE PROMISSORY NOTE or BANKRUPTCY? - REVISITED

Whether to agree to a negotiated promissory note in a short sale or allow the house to go to foreclosure is one of the most discussed topics around.  It deserves a simple comparison.

[February 3, 2010 update - see today's article on this subject at CNN MONEY.]

My previous article on this subject can be found at Negotiated Payback or Foreclosure Judgment Deficiency? Compared.

A negotiated promissory note is ALWAYS better than a deficiency judgment resulting from a foreclosure.  Here is why:

Deficiency Judgment -

1.  You have a foreclosure judgment against you and if you fill out most applications about your background you will have a question on if you had a property foreclosed upon you.

2.  You have a deficiency judgment which is a money judgment against you which means ANYTHING you buy is subject to attachment by the creditor, be it a car, a toaster, or a new swing-set for your kids.

3.  Your wages can be garnished.

4.  Your bank accounts can be frozen and attached - without any notice in advance to you.

5.  You will be subject to periodic depositions in aid of execution and have to provide copies of all of your financial matters - several times a year.  If you repeatedly don't show up the court can hold you in contempt of court and even put you in jail (YES - JAIL!!) until you comply.

6.  In Florida (check other states) you can enjoy each of the above for 20 full years before the judgment is no longer enforceable.

7.  The judgment usually carries interest.  Check your state for the rate.  For judgments rendered in 2009 the Florida statutory rate is 8%.

8.  FANNIE-MAE underwritten mortgages cannot be obtained until 5 years after the foreclosure judgment.

Negotiated Promissory Note -

1.  You pay an agreed amount according to the promissory note, which is usually monthly and often at no interest.

2.  If you no longer can pay you may be able to negotiate a new payment amount or abate payments for a period of time. 

3.  You may be able to re-negotiate the terms of the promissory note in the future.

4.  The promissory note is not a judgment so it does not show up on the credit report.

5.  If a foreclosure suit was entered, even if it went to a foreclosure judgment (but not a sale), the lender will likely dismiss the suit and vacate the judgment, clearing your record - even before you start paying on the promissory note.

6.  If you stop paying on the promissory note the note holder can then seek a money judgment for the unpaid amount.

7.  FANNIE-MAE underwritten mortgages can be obtained after a short sale in just 2 years.

8.  Once you repay the promissory note the lender should remove degrogatory credit report postings regarding the payment of the mortgage for "less than the agreed amount", instantly repairing your credit score.

Bankruptcy -

Many people speak to me about Bankruptcy as the better option.  It is an option - but when it should be used is a big issue.

Declaring bankruptcy is a LAST RESORT.  In a chapter 13 (personal reorganization) you are effectively "betting the farm" that you can perform for the 5 or so years of planned payments.  If you default you revert to either a dismissal or a chapter 7 total liquidation- and you cannot refilefor many years.  Bankruptcy also is a final chapter so to speak.  There are no further remedies available to you for protection from creditors.  It is like one bullet in a pistol - you need to decide when is it absolutely, positively without any doubt necessary to pull the trigger.  You need to expand your horizons to not just today, but tomorrow and maybe thousands of tomorrows (days) before you can walk back into bankruptcy court.  Chapter 13 and Chapter 7 have their useful purposes but they must be used prudently and carefully. A bankruptcy is the worst hit you can give your credit report.

If a promissory note just does not work out and the lender is relentless and THEN gets a judgment for payment of the note amounts, you will then be in no worse situation than if there was a deficiency judgment.  In my opinion you will be in a better position if you weigh the positive and negatives of each position and work your way slowly and methodically through the available remedies step by step.  If at the end of the line it did not work out, then you have the bankruptcy alternative remedy.  But without giving each step an opportunity to work for you makes no sense - don't throw your self overboard!

Copyright 2009 Richard P. Zaretsky, Esq.

Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make.  This article is for information purposes and is not specific advice to any one reader.

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660  RPZ99@Florida-Counsel.com - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide!  Shortsales@Florida-Counsel.com  New Website www.Florida-Counsel.com.  See our easy to find articles at Need Short Sale Information? - These Articles Probably Answer Your Question