After foreclosure or short sale in Georgia, Do I still owe any money?
After foreclosure or short sale in Georgia, Do I still owe any money? Believe it or not the answer may be yes! Georgia is one of over 30 states that does allow the lender to collect from the home owner after a foreclosure. A recent article on CNNMoney.com explored some of the reasons but here is my explanations as simple as I can make it.
When you obtain a mortgage the loan is based on two factors.
- Your credit. One component of the loan is your promise to repay.
- The value of the collateral. This is the security that the value of the home provides.
When a home is foreclosed the value of the collateral is gone. The bank can resell the home for as much as they can get but if it is less than the entire loan amount they are still owed money. The foreclosure does not erase your promise to pay.
An agreed short sale can be the same. However since a short sale is a negotiated agreement it is very important that the negotiations include a release of liability from the loan. If that is not included then you still owe and the bank has the right to attempt to collect the shortfall even if they have agreed to the short sale.
Here is a portion of short sale contingency provided by the Georgia Association of Realtors:
"...This Agreement is therefore contingent upon Sellers mortgage lender(s) agreeing to: (1) take a reduced pay off on its mortgage(s) in an amount sufficient such that the purchase price of the Property pays off the reduced amount of the mortgage(s), any other liens, judgments and other encumbrances on the Property, the real estate commission(s) owing to the Broker(s) and the other expenses of sale for which Seller is obligated under this Agreement, without Seller having to pay any additional sums; and (2) release Seller from any claim, cause of action, suit or judgment for the amount of the reduction in the payoff on said mortgage(s)...."
Item #2 says the entire sales agreement is contingent upon the bank releasing the seller from future liability.
In either short sale or foreclosure the money is collected through the use of a deficiency judgment. Deficiency judgments have been fairly routine and common in the past after a car repo. The gets repo'd, sold at auction, and then the bank comes after the former owner for loss. Its the same process with houses but the numbers are a lot bigger.
This is another blog post in the works, but here is where I think a lot of us agents may fall short. Selling the home is not always the best option for the seller! Sometimes we are not the answer. A struggling home owner needs to explore other options like a loan modification or bankruptcy.
And that brings me to my final point. There are 3 ways the seller can be released from the liability of the debt.
- Pay it off. OK, probably not really an option but it does release the liability.
- Negotiate the release of liability. If the home owner is doing a short sale or deed in lieu of foreclosure this needs to be a part of the process.
- Bankruptcy. Chapter 7 bankruptcy is the legal action that removes the personal liability from the promise to pay. In some cases the home owners best option may be to consult with a good bankruptcy attorney.
Are you a home owner struggling to make payments? Feel free to contact me to see which options may be best for you.
NEW YORK (CNNMoney.com) -- As terrible as it is to lose your house to foreclosure, at least it's a relief to put your biggest financial headache behind you, right?
Former homeowners may still be on the hook if there's a difference between what they owed on their mortgage and what the bank could sell it for at auction. And these "deficiency judgments" are ticking time bombs that can explode years after borrowers lose their homes.
It can even happen to people who got their bank to approve them selling their home for less than it is worth.Entire story here: http://money.cnn.com/2010/02/03/real_estate/foreclosure_deficiency_judgement/