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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.

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!

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

Posted by Richard Zaretsky, Florida Real Estate Attorney on 01/27/2009 08:43 AM

Comments (25)

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

JAN

Richard

Great Information! Have you seen the lenders going after the owners of the homes that get foreclosed or do a short sale?

Richard

Great Information! Have you seen the lenders going after the owners of the homes that get foreclosed or do a short sale?

Richard,

If people would only listen! So many seem to think they're entitled to the lenders money. Both entitlement and being a victim have become PC.

Well done.

Bill

One note....check with your state as far as it's laws. In California, we are a non-recourse state and if you allow the home to go to foreclosure they cannot come after the homeowner for anything more than what they get out of the sale, so they have real incentive to try and work with the homeowner. Plus a foreclosure is not really that much worse on a FICO score...so in California, it's probably better to allow the home to go to foreclosure than accept a note. Sellers in the situation should check with an attorney before signing a note.....they could be paying for years on something when they really just need a fresh start.

You have provided great information on here! I know alot of people in my area feel that bankruptcy is their only option when its not.

Would you mind if I posted this on my website? Giving credit to you of course b/c I am no RE Attorney.

Thanks

Leslie

Boy...I love that they give you such good alternatives even if they all suck.

Re-Post away Leslie!

FEB

Great information in lay terminology! Love it!

FEB

Richard,

I recently had an approved short sale that took 7 months to get an answer on. I won't mention the bank but I can tell you that the offer was a cash deal. Once the lender agreed to it...they requested the seller pay a 30K promissory note. Which in my opinion too is a better option especially when someone is being relieved of over 350K. I know that it's still the owners responsibility and they should be grateful but when we went back to the negotiator and asked for the terms and the rate...they basically told us it wouldn't be disclosed until the closing. We then told them that wasn't fair and how in the world would anyone sign off a note without knowing the terms and conditions? They said it generally would be anywhere from 6-30 yrs and at an affordable rate...well what's affordable to me and you might be totally different from what the lender thinks it is. My clients couldn't make a definitive decision and the lender said they would ask the investor if there was anything they could do. They came back to us 2 weeks later and denied the short sale based on a hardship that didn't meet their criteria.

Just to let you knoe that the seller owned other peoprty in FL that they were renting out but were losing money and were in the process of all going into the same foreclosure as this property.

The deal died. the lender couldn't care less. I did tell my client at the beginning that this was going to be a very hard deal to make because of the large debt and the other properties they owned. And this was at a time when lenders wouldn't even consider a short sale on investment property.

The bottom lines is that I was very disappointed that they wouldn't disclose the terms and conditions.

Isn't a promissory note just like getting a loan? Doesn't the lender have to disclose the terms and conditions? I told my client to consult an attorney and or an accountant on their decision.

I thought the whole thing was unfair and I realize the seller was still responsible either way. Both of us agents and the attorney who helped me negotiate...gave into all their demeands but this is how the handled in my opinon a very deceptive business practice.

FEB

Richard,

Great information! Thank you.

I'm trying to buy a short sale property now, and Wells Fargo has just rejected my offer. (It's appraised for 85k. I offered 100k. WF wants 210k, essentially what is owed on the note. It needs all new systems, roof, siding, etc.)

This is an investment property for the current owner, who has had several other foreclosures in this area in the past year. Does the bank still have an incentive to complete a short sale? Or would they just as soon foreclose? I trying to determine if they will reject any offer that I make, because they don;t want to offer a short sale to this owner.

This is my first home purchase, by the way. I'm not in a hurry, thank goodness. I just want a place that's priced right and that I can put some sweat equity into. Thank you!

Kris

Patience, Kris

Keep an offer on the table.

If it goes to foreclosure then follow up with the attorney for the bank saying you are ready for a quick sale - and offer the price you think is fair subject to inspections, etc.

Be sure to use an attorney to advise you that specializes in real estate!

MAY

Richard,

I am going trough a short sale on an investment property in Miami. The bank gave the approval for the short sale and at this point is on the hands of the closing negotiator. They asked me if I was able to sign on a promissory note and I couldnt commit to anything due to financial hardship.

At this point is there anyway to negotiated with them so that I don't get a deficiency judgment?

Thanks,

David

I assume you mean the "closing negotiator" asked you about signing a promissory note because the lender is demanding one.

You should be positioned (if the material to the lender was accurate and complete but not overly complete) to negotiate what that amount of the promissory note will be as well as its terms (how long and any interest rate). If you think the hardship you have is long term and you could not honor the terms of the promissory note, this must be made apparent to the lender so that requirement can hopefully be removed.

The key if that you should not enter into an obligation that you obviously and knowingly cannot honor.

Remember, there is no "judgment" unless a lawsuit is filed to collect on the promissory note. At this point you do not mention such a suit, so there can be no deficiency "judgment". In the future the lender could sue you for the deficiency unless they waive that right in writing as part of the conditions of the short sale.

I hope this helps.

JUL

Richard, I plan to reblog this article as I find it useful for my customers. I handle many short sales and not having a law degree prevents me from explaining the differences here. Have you written anything to go over the differences of a prmiary residence vs an investment property? Since there are great differences I was just curious if your advice would differ depending upon the type of property.

Thanks again for this great article.

Susan -

There is no difference in the understanding and application for this article whether it be primary home or investment property

JUL

Richard,

Very informative. You mentioned "In the future the lender could sue you for the deficiency unless they waive that right in writing as part of the conditions of the short sale." Does this mean that if the closing negotiator presents the terms of the promissory note, and the seller agrees to those terms, that the lender has further recourse to come after the seller again, for even more, at a later time?

This is the legal language that appears to be currently used by one of the major lenders these days (the second in my situation):

"XXX and/or its investors may pursue a deficiency judgment for the difference in the payment received and the total balance due, unless agreed otherwise or prohibited by law, if the short sale closes on the loan referenced above. In addition, if this loan is covered by mortgage insurance, the mortgage insurance company may reserve the right to pursue the seller for the deficiency based on the terms of the mortgage insurance policy. Furthermore, there may be tax consequences associated with entering into a short sale. The seller is encouraged to seek the guidance from an independent tax advisor, and/or an attorney, before proceeding with the short sale.

If this short sale is contingent upon XXX and/or its investors receiving a promissory note, we will reserve the right to collect the full amount on the new promissory note which may lead to us pursuing a deficiency on that balance should the need arise. If the short sale does not close, then we will pursue all remedies under our note and mortgage."

Am I reading this correct that if a promissory note is utilized, the collection amount would be limited to this new note, rather than the original deficiency? The first paragraph mentions "unless agreed otherwise". Is the promissory note derived from this language? Lastly, once again, if a promissory note is agreed to by the seller, does the lender have recourse to collect more at a later time, or is the promissory note the proverbial "end of the line" for the lender?

I thank you in advance for your time,

Ron

Ray -

You are correct in that the new promissory note defines (or limits) the new remaining obligation. Technically it may be called a "novation" or the creation of a new (dollar amount) agreement in substitution for the old (unpaid deficiency amount) obligation.

SEP

Richard:

Thanks for such a clear explanation! As a Florida real estate agent, I also would like to use this in my newsletter and website (giving you credit as author) and would like your permission.....

Maryann

MaryAnn - No permission needed - you can reblog this on your website by using the "reblog" icon at the beginning of the article.

OCT

Can the lender go after a deficiency judgement if their short sale approval letter included the following verbage--

"we are prepared to accept the offer in question as full satisfaction of the outstanding debt and will release the lien on the subject property"

or "we agree to accept the proceeds generated from this sale as full and final satisfation on the mortgage indebtedness"

That sounds very final to me. Am I wrong?

If I am wrong, how would they determine the amount of a deficiency judgement in a short sale deal that closed? (I'm in CA and the loan was a refi)

B. Schneider -

There is the mortgage encumbrance (a lien upon the real estate) and the mortgage indebtedness (the promissory note that is secured by the mortgage). So, if the approval letter says they are satisfying the indebtedness or the debt, that is a release. If the approval says they are releasing the mortgage (and I conservatively include language that says "satisfy the mortgage"), then I say they are not releasing the balance of the debt. If they say a full satisfaction of the mortgage, I take that to mean a release of the indebtedness (based on custom of language in a customary satisfaction of mortgage document).

You need to check with local custom in your state for the "gray" areas.

OCT

Very interesting your answers. Thanks for your contribution to us. I already closed a short sales and my client received a notification from the second mortgage lender about a suit for the deficiency. I am really surprised because in the approval letter they agreed to accept $2,550. in return to give him a satisfaction of mortgage. Their approval letter was pretty simple. Below I will wright exactly the text on the approval letter, I would like you to send me your comment since I want to make sure they have the right to suit my client, it looks to me that they are trying to push to see if they can get more money.

" This will confirm that a Satisfaction of Mortgage satisfying the mortgage recorded in Official Records of Miami-Dade County, Florida will be issued upon receipt of $2,550.00 from (my client name).The above referenced property will be released from any and all claims from Citibank (USA), N.A. "

The check for the amount mentioned was already cleared but the release was not recorded yet.

I would appreciate your comments. Thank you

OCT

Mercy -

This is a defensible position your seller has - but don't be too sure.... here is why:

1. A satsifaction of mortgage - that is your strong point. The typical form called a Satisfaction of Mortgage used in Miami Dade states that the holder is declaring the lien released and the debt paid in full (ie: the Note). So "custom" in the area is in favor of your client.

2. Not so for the next phrase. The "released from any and all claims from Citibank" relates to the property, not your seller. It does not mean that your seller is released from claims, only the property being sold.

Your seller needs to contact an attorney that can handle this for him /her in a communication with the lender and be prepared to go to court to defeat any demand for the deficiency.

NOV

I am about to purchase a short sale property (New York). The seller has numerous money judgments attached to the property that she cannot satisfy. Hence, if I want the property, I have to pay the outstanding judgments for clear title . The bank that holds the mortgage refuses to pay off these judgements.

Am I afforded the option of debt consolidation for these outstanding judgments- although they are not mine? . Any advice on the best way to have these judgments reduced would be greatly appreciated!

Carol

You absolutely must have those judgments cleared or the judgment holder can take your title to the house by sheriff's sale. Any creditor would be crazy to negotiate a settlement when they are guaranteed full payment including costs of collection and interest if they cause a sale of the property. Also you cannot get financing on the property with those liens outstanding.

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