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

By
Real Estate Attorney with THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY
https://activerain.com/droplet/7r7

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

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Re-Blogged 7 times:

Re-Blogged By Re-Blogged At
  1. Janie Coffey 03/19/2009 12:44 AM
  2. Susan Milner 07/22/2009 01:55 AM
  3. Tim Ludemann 08/19/2009 07:58 AM
  4. Charles Stallions 10/27/2009 02:26 PM
  5. Jim McCormack 06/11/2010 07:05 AM
  6. Speed Equity® Mortgage Acceleration System 08/08/2010 08:57 PM
  7. Christine McInerney 01/14/2011 09:16 AM
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Anonymous
HP

I cannot afford my NJ home as me and my wife lost jobs. We are also moving out of the country and don't intend to come back anytime soon. I am considering "deed in lieu of foreclosure" as the home value is 20% below. I have 1st and 2nd Mortgage from same Bank.

1. How do I go about it? Talk to Lawyer first and then my Bank. What type of Lawyer? Can you recommend layers or any strategies to convince the bank?

2. If the bank doesn't agree on a deed in lieu i will be forced to "foreclose". I am assuming the "deficiency judgement" only kicks in if the house gets foreclosed.

3. Only assets I have in US are the 401K and Social Security. I understand the "deficiency judgement" cannot access my 401K and SS money. Right? But what if I start removing money from 401K in the next few years?

4. How long does the deficiency judgement last in NJ? i.e. when can I start withdrawing from 401K without being concerned about banks forfeiting my money as I withdraw it

5. Do collections agencies go and collect deficiency judgement from abroad?

Any advise is appreciated

Jul 26, 2010 11:12 AM #49
Rainmaker
34,902
Speed Equity® Mortgage Acceleration System
Speed Equity® - Olympia, WA
We help your clients Own Their Homes Years Sooner

Richard, it's been a marathon effort going through all your blogs, but by God what a great education I am getting.

AR should be paying you for posting such excellent educational content.

Thank you.

Aug 08, 2010 06:13 PM #50
Anonymous
Chris

Richard, I am in the middle of short sale.  Let's say for the sake of the argument I bought the place for $200k with Bank A providing $150k and Bank B providing $50k.  I did provide a hardship letter which highlighted my extenuating circumstances. 

Bank A just approved of the sale and I'm looking at the documentation which says at closing the cash contribution is to be $0 and in the area where they discuss a promissory note, it says NA.  

This leads to me to believe I will not have a deficiency.  Does this sound right?  How can i find out if if there will be any tax consequences?  And what issues may I say from Bank B?

I appreciate any guidance you can provide.

Oct 13, 2010 10:48 AM #51
Anonymous
Jane

We live in CA which is both a judicial and non-judicial state. We have 4 vestment properties that are all underwater. These properties are in one of the hardest hit counties during this recession. And, it's getting worse. The loans are with one bank, all conventional with a 20% down from our nest egg. We own one property valued at $800,000+ which is mortgage free that we also rent out.

We have been subsidizing all 4 properties heavily for several years now due to the declining economy.  Our cash savings is dwindling.  Our income dropped as I retired from a nightmarish job with the plan to seek other employment as I have extensive professional experience, but I am still looking.

My husband doesn't want to put any more money into the 4 properties. Houses next to our properties are in foreclosure further pushing down the values or our property, tenants are\have lost their jobs causing us to dig even deeper into our pockets. No matter how we try to uphold our end, everything is falling apart all around us.

My husband wants to foreclose and stop the bleed. He feels assured that the bank will not pursue  deficiency judgements. Two lawyers and our real estate agent have told us the same as it is evidently customary in CA for banks to do non judicail foreclosures which don't allow for deficiency judgements. Also, our loan docs allow the banks to take over the property and sell them in the evet of default. But, I am still uneasy because we have the property asset that the banks can attach to (I think) and just don't see why the bank would let us of the hook if it didn't have to.

As far as short sales, the banks are asking for promissory notes for the deficiencies and other settlement contrbutions which I would think would be substantial in our case given our other asset. So, I'm thinking of selling the $800+ property. Then doing a sell by owner shortsale for the other 4 rentals. And then, making up the difference ourselves (if we can). But, no one agrees with my plan.

I would appreciate your comments.

 

Thank you in advance

 

 

 

Nov 03, 2010 10:30 AM #52
Rainmaker
589,415
Phil Leng
Retired - Kirkland, WA
Phil Leng - Retired

Hi Richard,

Nice to hear an attorney's perspective on all of this.

I fear that many short sale real estate agents end up putting their clients into a position of accepting a deficiency judgement, when a foreclosure would have been better.

Phil

Jan 25, 2011 12:48 AM #53
Rainmaker
270,268
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Phil

I think you have it backwards.  If there is no lawsuit there is no deficiency judgment. In a foreclosure you are likely to get a deficiency judgment. In a short sale, IF there is an agreement for payment of some portion of the deficiency, then if that payment arrangement is not honored the lender may file a new lawsuit on the unpaid agreed portion.  The key is the old adage, to get a judgment you need a judge.

Jan 25, 2011 04:17 PM #54
Anonymous
Kristin Gonzales

Hi Richard,

We have been trying to do a short sale in CA for almost a year. Both banks have agreed and approved the short sale (with the 2nd bank agreeing on 15K for the deficiency)

Here is what the letter says:

Based on the information provided and a fully executed Purchase Agreement, you ("Seller") have been

approved for a Short Sale pursuant to which:

a) PNC will release the mortgage pledged as collateral for the Account upon receipt of a minimum of

$15,000.00;

b) PNC will not pursue collection of the remaining deficiency balance* ("Debt Forgiveness"), which

after receipt of the PNC Proceeds of Sale will be approximately $70,055.65. Additional interest and fees

may increase the actual amount of the deficiency balance. If the Account is an open-end Home Equity

Line of Credit Account, the line will be closed and no additional funds may be borrowed on the line; and

c) PNC will report the amount of the Debt Forgiveness as "account paid in full for less than the full

balance" to the credit reporting agencies.

This offer is subject to the following requirements:
1. Seller of the Property receives $0 back at closing;
2. Any overages, tax credits, or additional sale proceeds of any kind must increase the
amount of PNC Proceeds of Sale unless otherwise due to a more senior lien holder;
3. PNC must receive a true and correct copy of the HUD-1 signed at closing;
4. Seller acknowledges that except for the release of the PNC mortgage, the Debt
Forgiveness, and the closing of the line (if Account is an open-end Home Equity Line of
Credit Account), all other terms and conditions of the Account remain in full force and
effect; and
5. This offer is valid until February 17, 2011. hi order to accept, certified funds must be
received no later than 4:00 PM on that date, payable to PNC Bank, and sent to the
following address:

2 questions I have reguarding this...

Will this letter really release us from them coming back at us for more and also if we do end up foreclosing (highly likey because our buyers keep backing out for different reasons...we've had about 4) our real estate agent is telling me that I can still pay the 2nd bank the 15K and they will still release us from the deficiency and not force us into bankrupcy.

Any thoughts are greatly appreciated!

Thanks so much!

-Kristin

Jan 31, 2011 08:29 AM #55
Rainmaker
270,268
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

We have had this similar situation Kristin.

If the buyer walks, try to pay PNC the $15,000 under the same deal.  It does appear to be a waiver of deficiency rights of PNC so you want to take advantage of that.  On the other hand, if you can't get the house sold and the 1st forecloses (and the first mortgage is a recourse loan under Californial law), then you may have spent $15,000 needlessly since you may choose at that point to file a bankruptcy, which would have eliminated your liability on the 2nd loan anyway. 

You should get California counsel to advise you.

Feb 01, 2011 12:27 AM #56
Anonymous
Jack

Hello, Richard, and thank you for such a great blog.

We are trying to short-sell our house in Florida.  Our first sale fell through a day before closing on the buyer's financial end.  We have a bank-approved price now and are hoping for another buyer.  We have a 1st and 2nd mortgage through the same bank.  The 1st mortgage is asking for $2K at closing and offering a letter of release.  The 2nd is also asking for another $2K at closing and refusing to give us the letter of release for the remaining $50K.  In fact, they have asked us to contact their Recovery Department within 10 days of closing to discuss repayment of the $50K.

Just curious, but if we refused to pay the deficiency - since it would no longer have collateral against it - would the defaulted deficiency eventually "fall" off our credit report after 7 years of non-payment?

Feb 14, 2011 10:40 AM #57
Rainmaker
270,268
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Jack - you need to re-read the article and the links in it.

The credit report has nothing to do with the deficiency that can be collected against you.  Credit blemishes, if a negative report, are wiped off the credit report after 7 years, but if you still owe the money that negative report can be continuing, unless the debt is now barred from enforcement.

What I think you want to know is how long until the bank can no longer pursue the deficiency and that answer in Florida is 5 years from the short sale date - unless they get a money judgment against you, in which case they can no longer enforce that money judgment after 20 years from the date the judge grants the judgment.

You seriously need to see an attorney to answer your questions.

Feb 14, 2011 11:47 AM #58
Rainmaker
1,483,906
Gary L. Waters Broker Associate, Bucci Realty
Bucci Realty, Inc. - Melbourne, FL
Fifteen Years Experience in Brevard County

Great info and discussion here. Having been personally involved in a foreclosure/bankruptcy situation I can appreciate the issues! I think I just admitted previous mistakes! Life does go on. Thanks, Richard.

Apr 17, 2011 01:13 AM #59
Anonymous
Rene

I live in Florida (Palm Beach County) and short sold a home that had an equity line of credit of 50K.  The outstanding 1st mort balance was 181K plus the equity line (50K).  The property sold for 60K.  The 1st threw 4100 to the second to release the lean to allow the sale to go through.  The 1st agreed not to pursue defficiency and is in writting.  At closing they had me sign a promisary note for the balance of the second with a time frame in which to contact the bank and make arrangements.  Well I was late getting back to them to make the arrangements and for that I take responsibility.  The bank did not want to deal with me and referred me to the attorney.  I tried to settle with the attorney but they would not accept my offer of $500 per month.  They insisted on 650 which I cannot afford right now.  Well the bank issued a satisfaction/release of mortgage on the second - less than a month after we closed and I did not realize this.  I called to ask questions (both attorney & bank) as to why did I sign a promisary note when you filed with the clerk of courts a satisfaction/release of mortgage document for the equity line account (both 1st & equity line are with the same bank).  I believe they were supposed to issue the satisfaction/release of mortgage for the 1st but made a mistake and did it for the equity line of credit.  No answers - of course, no replies.  Low & behold a motion for summary judgement is served to me.  I answered and again asked the same questions in my response letter which was mailed to court, the attorney and the bank.  Well, I am appearing in court this Tues.  Do I have any defense?  I am sure the satisfaction/release of mortgage document is for the second.  Can I still be sued when the bank says this equity line is satisfied?

Jun 10, 2011 09:15 AM #60
Rainmaker
270,268
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

The question is what does the satisfaction say and what does the agreement to release say as received from the 2nd lender.  Also, what are they sueing you on?  I assume this motion for summary judgment is on a lawsuit by the 2nd lender.  If so, it is probably a separate action just on the promissory note.

In regard to the new note, that is an interesting twist.  The bank may be "estopped" from suing on the old note if there is now a new note they  took in substitution - and that would be then a separate default situation and perhaps the need for a different lawsuit.

Call if you need us!

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 email: 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 understand articles at:

TABLE OF CONTENTS - SHORT SALE AND LOAN MODIFICATION ARTICLES

Jun 12, 2011 05:10 AM #61
Anonymous
Alex

I live in Michigan and recently my property sold at a sheriff's sale. Wells Fargo (which is also the lender) was the highest bidder at the auction (no surprises there). I have 6 months from the date of the foreclosure sale to redeem the property, short-sale it or just walk away. I contacted Trott & Trott, a debt collector for Wells Fargo on this case, to get the total amount in order to redeem the property. The new pay-off is 50% less than what I owe. It's a matter of writing a cashier's check to Wells Fargo of the amount they requested and a small fee to the collection agency for preparing the redemption receipt... However, there's no way of knowing if Wells Fargo will waive the deficiency balance.

Is there a way I can ensure myself before redeeming the property that Wells Fargo will not come back for the deficiency? Is there some type of request form or any type of written letter that I can submit to Wells Fargo and hope that they will waive the deficiency rights? Do I need to hire an attorney to formulate a letter to the bank on my behalf?

Please advise. Thank you.

Jun 27, 2011 06:09 PM #62
Rainmaker
270,268
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Alex -

Don't confuse paying the collection company with redemption of the property from foreclosure. The payment to the collection company may only be for the deficiency - not the redemption of the legal title from the bank!

Definitely seek the advice of Michigan counsel that specializes in real estate.

Jun 28, 2011 03:18 AM #63
Anonymous
Will

I own a single family home in Wisconsin. After a divorce we no longer made payments. Placed on the market I've discovered the home worth 40K less than what I owe. Wells Fargo has obtained our hardship letter explaining our situation. I don't recall receiving an approval letter. Is this pertinent? Also how do I know an appropriate amount to list the home so that Wells may accept my short sale without a deficiency judgment? Do I consult Wells Fargo with as much $ as I can get from it and then go from there?

Aug 08, 2011 02:51 PM #64
Rainmaker
270,268
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Will - (#64) -

Keeping communication open with the bank is always a good thing.  That said, it will NOT prevent a foreclosure from being filed nor from progressing through the courts, and you still could lose the home because of non-payment.  Banks usually let "short sales" proceed when the buyer and seller are unrelated and the sales price is within a small margin of the current "fair market value" as determined by your bank.

Most lenders provide a short sale approval letter AFTER you submit all of your financial information, hardship letter and signed contract with proof of deposit and proof of seller's ability to close (the rest of the money either in cash or mortgage).

Seldom is there a short sale approval letter based merely on the "desire" to sell the home at a loss.

Good Luck!

Aug 09, 2011 01:13 AM #65
Anonymous
shannon

Hi, great information, thx!

We short sold almost a year ago. Agreed to, signed, a 10k promissary note. A month after closing I tried to pay the note off in full to PMI, but the bank (SunTrust) hadn't yet sent the bill to PMI. So we got a letter in writing from PMI saying that we do not owe anything at this time (even though according to the documents we signed at closing the loan should have started repayment).  Fast forward to 10 months after closing, and still no notice to pay. I'd have the money to pay and would like to get this note paid off asap. OR not have to pay it at all. How long do they have to get this thing going (live in VA if that matters).

Thanks!!!

Nov 01, 2011 09:18 AM #66
Rainmaker
270,268
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Shannon -

You need to determine the statute of limitations for enforcement of a deficiency judgment from the date of the short sale.  Here in Florida it is 5 years after which they can try to collect but cannot file a for a judgment against you.  Contact any litigation attorney and he/she can advise you.

Nov 02, 2011 02:25 PM #67
Anonymous
bruce berman

thank you for all help

Jun 20, 2012 02:05 AM #68
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