Negotiated Payback or Foreclosure Judgment Deficiency? Compared

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

I was negotiating on a very large problem mortgage today with a high-up executive at the servicing firm.  He made a comment that I thought peculiar and I called him to task on the matter.

The comment was that "after the foreclosure sale, lenders seldom bother to get a court ordered deficiency judgment".  I knew this to be false, because lenders today - more than in the past - are investing a few hundred more in attorney fees to get a deficiency judgment.  I will tell you why.

But first, lets all get on the same page.  A deficiency judgment is obtained when a property is foreclosed and sold (usually at the courthouse by the clerk of the court) to the highest bidder.  In most states a "deficiency" judgment can be obtained for the difference between the high bid and the higher foreclosure judgment amount.  Usually the court determines which value is higher, the high bid or the appraised value of the property on the date of the public sale, and the higher of the two is taken to determine the difference from the judgment amount, and this difference is the deficiency judgment.

Ok, back to the discussion.  Deficiency judgments are just that - judgments.  They are a pain in the neck to the debtor and can only be removed by paying it off or by bankruptcy.  Further, money judgments usually earn interest until paid.  In Florida right now that rate is 11% a year - better than the bank by far!

Now the bank that gets the deficiency judgment might have said that they seldom enforce a deficiency judgment.  They are right.  They sell the judgments for 5 to 10 cents on the dollar.  So for a $100,000 deficiency judgment they invest $500 in attorney fees and get $10,000 in return just for pushing paper.

The problem with a money judgment, which is just what a deficiency judgment is, is that it won't allow you to buy anything on credit!  New house?  Forget it.  New car?  Forget it.  You want to sell a house?  You got to pay off the judgment (there are some exceptions to this rule).

So the question then can be brought over to unsecured promissory notes on short sale shortages.  Yes, the banks do the same thing.  They get about 5 cents on the dollar.

The executive on the phone laughed and told me I was right - both in the concept and in the pricing and that his firm helps companies that hold these packaged notes collect them from the borrowers.

There is a lot of discussion about how a short sale vs. foreclosure affects a FICO score.  Frankly, even if it were the same, the differences in having a deficiency money judgment and a negotiated note are HUGE differences and that alone should settle the dispute.

Copyright 2008 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 understand articles at:

TABLE OF CONTENTS - SHORT SALE AND LOAN MODIFICATION ARTICLES

 

 

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Re-Blogged 2 times:

Re-Blogged By Re-Blogged At
  1. john fisher 02/06/2009 03:17 PM
  2. Speed Equity® Mortgage Acceleration System 08/08/2010 08:57 PM
Topic:
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Location:
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Coldwell Banker Group
PALM BEACH COUNTY SHORT SALES
Tags:
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loan work out
mortgage foreclosure palm beach
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Anonymous
Bala

cancellation of debt is fine if he lived in that house for 2 yrs -- otherwise he has to pay taxes i guess --

in our case ( even i have 150k ), i have decided to file bankruptcy in summer --so it will go away -- no way i can pay 150k -- i am consulting a lawyer next monday to ask him abt bankruptcy and what i have to do to file in summer -- i am moving to an apt in march first week-- u can reach me at bala_2000@hotmail.com --

Feb 03, 2009 10:22 AM #39
Rainmaker
281,515
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney
Feb 03, 2009 02:35 PM #40
Anonymous
Susan

Thanks for the article Richard.      Question --  If the VALUE of the debt on the 1099C is GREATER than the fair market value/appraisal ....is the debt still taxable ?

Feb 05, 2009 12:27 AM #41
Rainmaker
281,515
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Susan -

What do you mean by VALUE?  The 1099 amount is just that, an amount of dollars.  It does not matter the value of the property.

The 1099C is the amount of debt that was cancelled by the reporting entity (lender) as forgiven debt.  It has nothing to do with value of the property.  It has only to do with the amount they were owed under the note and the amount they accepted as a final satisfaction of that note.  1099C's can be issued under secured or unsecred circumstances -- it has nothing to do with the real estate.

Feb 05, 2009 12:38 AM #42
Anonymous
Bala

Richard,

Thaks u very much for your service.

I have a question.

My HELOC is 90 days past due and the account status is closed on my credit report ( but still they report).

Is it possible for them to get monetary judgement before foreclosure(I am trying for short sale -- looking for buyer) ?.Do I have to file for bankruptcy before they get the judgement? If I file after the judgement, do u think it will be discharged?

 

Thanks,

Bala

 

Feb 05, 2009 06:44 AM #43
Rainmaker
281,515
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Bala

The account status as closed means you can't borrow more money on the HELOC. It is still active since it is not a paid account.  The HELOC is a promissory note that is secured with a mortage on your property (house).  There is no requirement that you be sued first on the mortgage and then the promissory note.  They can just sue on the promissory note and get a money judgment against you personally.  This goes for both before and after the short sale UNLESS as part of the short sale you get a written document from them that says you are released from the obligation of the promissory note.

You never HAVE to file for bankruptcy.  It is your option.  If they have no judgment against you why file for bankruptcy?  Regardless of when the bankruptcy is filed, assuming you are qualified for a bankruptcy and want to go through that ordeal, it depends on what type of bankruptcy you file - liquidation or reorganization - as to the extent of discharge of the judgment or remaining obligation on the promissory note.

Feb 05, 2009 01:36 PM #44
Anonymous
Bala

Thank you so much for your reply Richard.

I have balance of $158,000 on my HELOC. It's very difficult for me to pay this amount. I am assuming the second lender is going to sue me for this amount and get judgement.I have unsecured credit card debt of $150,000.I have no chocie other than bankruptcy to avoid this debt. Do they arrest me if they get judgement and I didn't pay ? Thanks!

Feb 06, 2009 12:40 AM #45
Anonymous
Susan

Richard -- I beg to differ with you on the 1099 C in your comment back to me above.     It does have to do with real estate....and there is a box in the 1099C (box # 7) that declares the FAIR MARKET VALUE OF PROPERTY.    When I said VALUE of the debt on the 1099C-- perhaps I used the wrong word......and should have just said DEBT.        So back to my original question...do you know if the DEBT on the 1099C in BOX # 2  IS  GREATER than the FAIR MARKET VALUE IN BOX #7 on the 1099C....do you know if the debt is still taxable ?  

Look forward to hearing back from you.    Your knowledge about all this is very informative and appreciative !   Thank you  

Feb 06, 2009 01:14 AM #46
Anonymous
Susan

Richard --  after re-thinking this....I believe your comment was a "general comment" pertaining to cancellation of any kind of debt on a 1099C...right ?

I am talking specifically about real estate cancellation of debt.  In box 2 on the 1099C...it says amount of debt forgiven..$ 285,000   In box # 7 Fair market value of property it says $ 150,000.  

I have heard and read on other blogs that IF the DEBT IS GREATER THAN THE FAIR MARKET VALUE OF THE PROPERTY ON THE 1099C...THEN THE DEBT IS NOT TAXABLE.

This is what I was wondering about....if in fact this is a possibility ? 

Feb 06, 2009 01:28 AM #47
Rainmaker
281,515
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Susan =

What you have read about the debt being in excess of the FMV of the property is a reference to the "insolvency rule" under the Internal Revenue Code.  I address this in the article SHORT SELLER STILL MUST DECLARE INCOME ON SALE!  see item 2 in that article.

 

.

Feb 13, 2009 06:33 AM #48
Anonymous
Sergio

I have a property in the process of forclosure, and my property it'll be sold in auction in march,-3-2009,. I owe $150,000 in this property. let say that they sale it. for $100,000. Am I responsible to pay for the difference AND Can do they to put a  lean in my primay home. thank you for your comments.  

Feb 25, 2009 07:57 AM #49
Rainmaker
281,515
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Sergio:

Most states have protections for a primary home.  Consult an attorney in your state for the answer to your question.

I am sorry you have this financial distress and hope the best for you in the future.  This too will pass.

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

Feb 25, 2009 10:22 PM #50
Rainmaker
281,515
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

I just had to reprint an ActiveRain message I got the other day - it shows the deep issues relating to the help people are "supposedly" getting in the marketplace - the name and telephone are omitted.

Hi Richard,

I saw your website online and read a couple of articles of yours. I believe I need help because the people that are helping me now do not seem to know what they are doing. No real solid answers. The people that I have hired call them selves florida shortsale specialists. Not attorneys. I have a lot of things going on in my situation that I don't believe they can protect me properly. I need the right advice so I do not get burnt in the end. I really need an expert to help with this stressful processs.

Quick summary. i live and work in Ohio as a dentist. I bought 2 homes in Florida and the bubble burst. The one I stopped making payment on is in Homestead. I have missed about 2 payments. I just finished getting a divorce last week. It was kind of stressful and was taking a lot of my attention from this. Because there is a lot of informaton for my case If you can tell me how to proceed to either give you a more detailed email or call me that would be great. The faster the response the better because I think it needs immediate attention.

Feb 27, 2009 11:50 PM #51
Anonymous
DFrank

I lost my job 6 months ago in South Fla. I have been unable to find a job here and a salry that would pay the mortgage. I am going to work out of state for half of my previous pay. I have the home listed for shortsale. I am current on payments but have made my last.

Everybody tells me not to worry just yet as I am about 1 year away from that...easier said than done..

If the worst happens and it does not go in a shortsale I am about 120K upside down at this point according to comps. What is the likelyhood the bank will sue for deficiency. I have no other property, no real assets. Would they ruin the rest of my life by garnishing wages on something that will grow each year with 11% interest. I could never recover..

If so what options do I have. I simply cannot pay it,  I no longer have the income.

 

Apr 02, 2009 07:50 AM #52
Rainmaker
281,515
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

DFrank

You are some time away from being kicked out of your home -- but that is not a solution.

You have to assume that the deficiency left in a foreclosure will be pursued.  This is because the lender who forecloses on you will either get the deficiency and then either collect on it in the future (they will have 20 years to do so) OR they will sell the right to get the judgment (or the judgment itself) to an investor who will then pursue you until they get paid an amount that satisfies them.

For the purpose of this type of judgment you are talking about 20 years until it can no longer be pursued.  A lot can happen in the next 20 years.

I suggest you get it sold at a short sale -- remember it is only a matter of supply and demand and the adjustment you control is price.

Apr 07, 2009 02:10 PM #53
Anonymous
Hudson

If I sign a promissory note for the PMI company in a short sale and the lender/servicer agrees to report the short sale of my home as paid in full to the credit bureaus would I be able to purchase another home/get another mortgage immediately?

Jun 12, 2009 07:13 AM #54
Anonymous
Julie

Do i understand that it is better to do a short sale then a forclosuer?  By doing a short sale we will have to pay back the deficiency but with a forclosuer it is the same only that they can garnish waes and attatch leins.  if we were to do bankuptcy it would damage our credit and we would no longer be able to buy even a car?

Aug 17, 2009 04:41 AM #55
Anonymous
Darren

How do you negotiate a deficiency judgement being pursued by the lender.  After foreclosure, the lender has transferred the deficiency to an attorney.

Oct 20, 2009 03:21 PM #56
Rainmaker
281,515
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Essentially, the attorney is going to want a judgment and then pursue you for the next 20 or so years (depending on how long a judgment lasts in your state).  You want to avoid the judgment and give the attorney the ability to convince his client that what you are offering is better than the judgment he can get. 

Cash now is a very powerful tool.  It avoids all the pitfalls of you protecting yourself (at some sacrafice) to acquire assets and thus thwarting the judgment holder from getting a useless judgment.  Or you can have an agreed payout without a judgment.  The key is you want to pay less than you promised to pay originally.  But you are going to have to take a position of doing one or the other - protecting yourself for a long time, declaring bankruptcy, or undertaking a payment plan.

With the above being said, please understand that this response is a general comment about the law and is not expressing a legal opinion about the very general fact pattern raised herein.  As such, this brief response may not be relied upon for any purpose.  Please consider obtaining formal legal advice if you have a specific fact pattern with respect to which you need an answer.

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 understand articles at:

TABLE OF CONTENTS - SHORT SALE AND LOAN MODIFICATION ARTICLES

 

Oct 22, 2009 10:27 PM #57
Rainmaker
35,008
Speed Equity® Mortgage Acceleration System
Speed Equity® - Olympia, WA
We help your clients Own Their Homes Years Sooner

Richard, thank you. This post has answered my question about whether a short sale will result in a deficiency judgment. 

Aug 08, 2010 01:00 PM #58
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Richard Zaretsky

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