What Happens With the Short Sale Deficiency Balance? Part 1

Comments (43)
June 21, 2008

Short Sales always result in a some type of deficiency balance. After all, if you owe $250k on your home and the lender chooses to take a short sale that returns to them only $115k then a $135k deficiency is created.

How that deficiency is handled is probably the most common question that I get as a Bank Negotiator. Because it is a question that is probably at the forefront of your mind I’m taking extra time to create a three part series that touches on the way that deficiency balances are handled in short sale situations so that you can plan for the different scenarios that you may be presented with once your bank has come to a decision concerning your short sale proposal.

I recently came across an article by Lance Churchill that confirms the 3 ways of handling the deficiency balance which I outline in this video. He also goes over some tax implications as well. Click Here to Read Lance’s Article - "After The Short Sale: Taxing What Isn’t There"

If you have a specific question or insight on this please put it in the comments below and I’ll be sure to address it.

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43 Comments, Comment or Ping

  1. This video was great! My husband and I are agents and have been lucky enough to not have to deal with a short sale until now. I have had quite a few questions from buyers up until now and this was very helpful to address those questions. Great video!!! Thanks!

  2. Ken Gilbert

    Brian,

    I have been hearing about another option from Bank of Amercia. They handle their short sales as a charge off. Can you explain how a short seller would be impacted by this 4th method (charge off)?

  3. Ken Gilbert

    Brian,

    I have been hearing about another option from Bank of Amercia. They handle their short sales as a charge off. It is my understanding that the banks writes off the balance on their books and then sends the balance owed to collections. I also understand that they will list the balance as “settled less than owed” to the credit agency. Can you explain what a charge off is and how a short seller would be impacted by this 4th method (charge off)?

    Thank you,

    Thank you,

    Ken

  4. Ken,

    A charge off is similar to a soft note. The bank is simply not forgiving the balance.

    If the negative amount is $40,000 and the bank “charges” it off, then they can sell that bad debt for one or two cents on the dollar. Thus they would receive $400 for a $40,000 charge off. The debt collector would then try to collect $800 or $1000 or $2000 to settle.

    Most banks do not go straight to a charge off. They have the seller sign a soft note, then if the seller doesn’t pay they charge it off and you get the above scenario.

    Think about it. If someone agreed to pay $250 p/month and they paid for 3 months, then the bank would have gotten $750 + the $400 for selling the debt to the collection agency. If they go straight to charge-off then then lose the chance to collect those upfront payments.

    That’s why it’s rare that they do so.

    Either way, if the debt is not forgive, the only way to make it “go away” is to pay it off, try to arrange a settlement on the balance sometime down the road, or write it off through bankruptcy.

  5. What happens if you have 1st and 2nd 80/20 and need to short sale will there be any deficiency owed? I heard something about the MI will come after me , but I thought an 80/20 means no MI? OWED 560,000 short sale contract 335,000. Wells fargo is the 2nd.

  6. Clint,
    If you have an 80/20 and there is no Mortgage Insurance (MI) then it wouldn’t be possible for the MI company to come after you because they don’t factor into the picture.

    Either the first or the second could come after you for the balance, but the goal of a short sale is to get this settled and in writing.

    The bank may have a policy that they will NOT give any assurance that a deficiency balance will not be pursued or they may have a policy that they fuse it into EVERY settlement demand letter that they will be closing the book on the debt. You never know which way your bank will go until the end of the road.

    There are no hard facts to go on, but the consensus in the short sale community is that we are seeing less than 5% of banks going after homeowners for the balance in either a short sale or full blown foreclosure situation.

    The reason is that it’s like throwing good money after bad. The banks know that if they hire an attorney to go after the deficiency balance, a LARGE portion of those sued would just run out and file for Chapter 7 anyway.

    Their feeling is that they are NOT going to be able to pay the large amount back under any circumstances and so you might as well file for Bankruptcy protection NOW and start the recovery process asap.

    This means that the bank would be inuring additional loss on that file in the form of additional attorney’s fees and court costs. It just doesn’t make sense.

    Of course, there is never a guarantee that a bank will not come after you for a deficiency balance, it’s just a low probability of chance.

  7. Brian have you heard of short sales being approved with a large amount of deficiency. For example I owe $560,000 and have a contract for $335,000 the market value appraisal came in around $307,000 is it possible the will accept that large amount?

  8. Clint,
    The amount you owe usually has no bearing on whether or not they’ll approve the short sale or not. (the exception to this being if you have an FHA loan…but as far as I know there are no $560k FHA loans, so I’m guessing that’s not you)

    Pretty much the only thing that matters is the value check (either appraisal or BPO) that is ordered by your bank.

    They’ll be required to NET a certain percentage of the figure that guy comes up with.

    So if they come out and do a value check which comes in right around the $307k figure you’re talking about, and they have a policy that they accept 90% of the value check, then they would need to walk away (after all costs are paid) with $276,300

    Even if you have 10% in closing costs (including a realtor’s commission) then the net to the bank would be $301,500…and it should get a green light.

    On the flip side, if the guy from your bank reports a value of $355,000 then they would want to walk away with $319,500…and the deal wouldn’t work.

    You can see that the #1 factor in getting a short sale approved is the value that the bank’s guys comes up with. After that, the percentage of that value they are willing to accept is second in importance.

  9. Nancy

    Hi Brian! Great Blog. I am getting ready to try to prepare for a short sale, through Chase, for my mortgage, and I am concerned about the dificencey, if approved. You mention in your video the Mortgage Debt Relief Act of 2007, which may forgive the deficiency balance. The relief act is for your “Qualified Primary Residency”. You mention a qualified resident are those that have been living in their home for two years. I only purchased my home 1 1/2 years ago. I cannot find anymore info on what qualifies as a primary residency. Do you think I should wait six months before persuing a short refi?
    Thanks in advance!

  10. Nancy

    Brian…correction on my above post .I am getting ready to try to prepare for a short REFI (not short sale sale), through Chase. Nancy

  11. Nancy,

    I couldn’t give you a good answer on that. My guess is that either it would still qualify like normal, or it would qualify, but you might have a prorated portion, and thus 25% of whatever the forgiven amount would be counted for tax purposes (similar to taxable gains when you sell a primary residence and realize a profit in under 24 mos)…

    Of course, you need to talk to a tax professional on this one, as I’m not a tax attorney.

  12. Becky

    If the short sale is on an investment property and the property is worth so little now, shouldn’t I make sure the bank doesn’t 1099 me on the difference of the loan write off but rather the difference in the current appraisal value and the amount they accept on the home when they 1099 me?

  13. Michael

    Hi Brian, nice video. I had a question about the bank “approving” a short-sale.

    You mentioned “The amount you owe usually has no bearing on whether or not they’ll approve the short sale or not.”, however, my bank is asking for a “letter of hardship” as part of the short-sale process. I am not currently in a hardship, but I’m so far upside in my house, it doesn’t make sense for me to stay in it. Do you have any advice as far as to how I should handle this “hardship” letter?

    I’m being told that if the bank denies my request to short-sell, then I should just walk away from the loan. I’m weary of doing that because of the consequences. What if the bank comes after me for the loan amount? Do I just file for chapter 7 and that’s it?

    Thanks for any advice.

  14. Michael,

    The fact that your house is so far upside down is now considered a “hardship” by many banks because it’s enough of a reason for people to walk away from their homes en mass.

    As to the hardship letter, make it sound as bad as possible while being honest. Stress how your mind is overrun with worry because of how far upside down you are. Talk about your fear of the economy and how job loss or pay cuts are lurking always around the corner (this is true for EVERYONE) talk about the fact that you have even mulled over the idea of bankruptcy. This gets their attention.

    Outline all the bad things in the letter but do it while being honest. There’s really no need to make things up, as everyone truly is in a tight spot these days just because of the negative equity aspect of things.

    As to a BK…I’m not an attorney so I can’t really advise on that. You said you are not in a hardship position. I dunno if that means you have large amounts of cash sitting around but if you do you might not pass the means test to qualify for a Chapter 7 BK. Not likely that such is the case, but it’s still possible.

    Most experts would agree that a foreclosure is worse than a Ch 7 BK. So if I was in your shoes and was worried about the bank coming after me, and they were NOT going to work with me a on a short sale, AND I had decided to walk from the house, I would file Ch 7 BK myself and include everything except for my cars. (keep your auto trade lines good)

    If the foreclosure is going to go down anyway, then it makes sense to start the recovery from both the foreclosure and the BK now vs. start one now and another later. I’d have peace of mind knowing the bank couldn’t come back after me and I’d be in a better position financially by offloading any unsecured debt in the process.

  15. Becky,

    Unfortunately, if you have an updside down investment property you don’t have much you can do on negotiation how the 1099 is handled. It’s kinda like a “take it or leave it” type of thing.

    After all, if they refuse to give you any assurance on these points (which is usually the case) you can reject the deal…but then you’re headed for foreclosure.

    It’s true that banks don’t want to take houses back…but their compliated agreements with the investors who put up the money for the loans means that they often have no say on these matters at all. You can tell them to contact the investor and find out before you’ll sign the closing docs, but that is often simply not a possibility for a various number of reasons.

  16. Matthew

    Brian,

    I’m in the position of owing approximately 112,000 on a home with two mortgages, and it’s only being evaluated as taxable value of about 90,000, and the homes in the area are currently selling for even less than that. I’ve recently lost my job, and went from making 80k a year, to unemployment. I’ve been out of work now since December, and am rapidly depleting my savings trying to stay up with my debt payments. What I’m thinking about doing, is taking a hardship withdrawal from my 401k, buying someone else’s foreclosed home for cash, and letting the bank have the one I owe all this money on that’s no longer worth even close to what I owe. My question is, how badly would this affect my credit rating, and how likely am I to have to deal with the bank suing me for the difference in what I owe, an what they eventually manage to get for the house, knowing it’s likely to be in the range of 50 to 60k.

  17. Matthew,

    I’m not really in a position to give you accurate advice as I don’t know the full details of your situation and am not an attorney. You might want to get some professional advice.

    That being said and based on my limited knowledge of your situation here is what I would do if you have assets as in the case of your 401k.

    I’d start by trying to negotiate an aggressive loan modification with the bank. Often this is only a temporary solution, if any solution at all. However, if you can bring your payments down for a year and delay your exit strategy then it might make sense to do so because the market is going to continue to march down for another 2-3 years while the Alt-A mess plays out. If you are going to buy with cash it might be best to do so when the market is as close to the bottom as possible

    Loan mods can sometimes be done without payments being missed, but sometimes you need to be behind before they’ll consider extending help.

    If a loan modification is not made available or the terms offered do not make sense for you then I would do as you said, draw against the 401k and buy a house cash.

    This “Buy and Bail” thing is frowned on by many. Usually the same people that are not in a hardship position. Anyway, if you are going to let the house go you might want to consider a Chapter 7 Bankruptcy.

    Why? Because if a foreclosure is a 10 mark on the “bad credit scale” then a Chapter 7 BK is only an 8. So if you are going to get a foreclosure it often makes sense to do both the Foreclosure and BK at the same time so you can start recovering quickly from both. Also if you include the house in the BK then you don’t have to worry about them coming after you in the future.

    Of course this all depends on your personal situation. If you have too many assets then you might not qualify for a Ch 7 BK. Details like this is why you need to speak with a qualified attorney. Hope it pointed you in the right direction.

  18. jorge

    My short sale was approved. WaMu sent me the demand letter and they included a sentence: “WaMu reserves the right to pursue collection of the remaining balance due on the promissory note for loan number XXXXXXX” which is my HELOC. After talking to a lot of people at WaMu and explaining my specific situation all the way to VP level, they agreed to remove this from my demand letter and they removed it. I have the new Demand letter.
    Is this enough for me to feel free from them trying to collect after the sale? … or will they have that right even if they don’t put it in the Demand Letter? State= Florida.
    Thanks

  19. Jorge,

    I don’t want to be the bearer of bad news but removing the clause you described doesn’t really change anything.

    In order to be truly worry-free about the bank pursuing you for a deficiency balance you need a clause that specifically says something like, “Upon closing and disbursement of funds as outlined here, Washington Mutual will consider this matter closed and will not pursue **YOU** for any additional form of deficiency balance.”

    If it’s not specifically excluded, then they have the opportunity to try to collect their money.

  20. Matthew

    Brian,

    Thanks for responding, I’m going to take your advice and see if I can find an attorney who won’t charge me an arm and a leg for some financial advice before I do anything else.

    Matthew

  21. Becky

    Hey Brian, your reply to Jorge caught my attention. Is there a time limit that the bank could try to collect the short sale deficiency from the customer once the short sale closes, or could it be they could still come back after it in many years from now and do so?

  22. I am trying to do a short sale. I have an offer, with a 55000.00 deficiency. I told my realtor I wanted to add to the contract offer to the bank, that I don’t want to be pursued for the balance left owed. I want to addendum the contract, and have the buyer initial it. he don’t like this idea. Of course all he is thinking of is his commission. Too bad. If I’m going to loose my house. I don’t want to be paying 55000.00 for nothing.
    What do I do with the realtor who has brought me a signed contract, and I thought any deficiencys were forgiven on these short sales. should I take my chances that the bank may just agree to not pursue me for the balance left owing?
    thanks, Bonnie

  23. Bonnie,

    Your question keeps coming up and the fact stands that you can’t dictate terms to your bank concerning how they’ll handle the deficiency. You can request that they put it in writing that they will not pursue you, but many will not. In fact, my guess is that over 70% of all approved short sales do not come with any guarantee that the bank will not pursue in the future so you are not alone.

    As to the buyer’s offer, you don’t need to put anything other than “sale subject to bank approval of the short sale” in most cases. If the bank refuses to see eye-to-eye with you on the settlement details then the deal can be canceled because the short sale wasn’t approved.

  24. Becky

    Bonnie, my short sale just went through and I couldn’t get the bank to put that sentence in my approval letter either (the loan on the first wouldn’t, but the loan on the second would….same bank held both loans). I just received a statement showing the loan on the first is down to zero and it clearly states the loan is “PAID IN FULL, THIS WILL BE YOUR LAST STATEMENT”. So my point to you is, I took a chance even though when I spoke with the bank before closing and they assured me they wouldn’t come after the $120,000 deficit, but they wouldn’t put it into writing, and I feel it was a good chance I took. I heard the reason they wouldn’t put it into writing was because it has to go back through their lawyers to revise the approval letter and it just costs them more money to do so. Two days after the loan closed, the foreclosure proceedings letter arrived stating the sale would take place on the court steps in three weeks. My sale ended up being made at the perfect timing to avoid the foreclosure proceedings. I was nervous about the promise not being stated in the letter from the bank that they wouldn’t come after me for the balance, but I was out of time and as it turns out, there won’t be any problem. I might add this was on an investment property not our residence by the way. There is a law that was passed last year to protect you on personal residences I understand so the banks can’t come after the balance from you……but you’ll need to check it out further. Best wishes.

  25. Shawn and Rebecca

    Your video was so helpful thank you. We are very torn - A shortsale was approved on our house, but the bank (1st) wont waive their right to not pursue the deficiency of 100k (that includes closing costs & commission to realtors) the 2nd 55k left owing wants it all paid back in a promisary note at 0%, our lawyer suggested stopping paying and foreclose-so we can settle with some of the $ saved in not paying- we can file chapter 13 if we have to after. Short selling seems like the losses would be less. We dont want to file chapter 13- or owe all of this in a short sale and worry in a foreclosure the balance would be even higher. Any input on if short selling or foreclosure is better in our case? We know you are not a lawyer- but everyone is telling us something different- realestate people, lawyers etc. Our credit may be hurt less in shortsale. Please help. We have to decide and want to get out of this nightmare owing the least amount possible and the least damage to credit.

  26. Becky

    After the short sale the Mortgage sent us a paid in full statement on our first, so that ends that on our ordeal. Just a heads up for you.

  27. Shawn & Rebecca,

    Here’s what I would do if I were you. This isn’t what I’m telling YOU to do, but what I would do.

    First of all, I don’t know why you didn’t bring up Chapter 7 BK as an option. A 13 BK always seemed like a nightmare to me unless for other reasons (lots of additional assets) you can’t qualify for a CH 7. My feeling was that if I were to take a big hit (foreclosure or BK) I might as well scrub everything clean with a Ch7 and start over…but that’s me.

    In your situation I would do everything I could to get a short sale done and approved. (I’m assuming you are behind on payments also) A short sale is not as bad credit wise as a foreclosure but it does have a negative impact…at least for 18-24 mos.

    Very few banks are giving a guarantee that they won’t pursue in the future which has everyone scared, but it is what it is.

    Once the short sale was done, I wouldn’t worry about the 1st. I might make one or two payments on the new P-Note to the 2nd and then stop. By that time it will probably be in a different dept and you could renegotiate that and try to settle for a lump sum of a few thousand dollars, or if they won’t work with you, let the trade line go bad. Do it fast so that once it DOES go bad it’s in the same time frame as when you are rebuilding from the short sale.

    If they pursue aggressively (sue) then I would go to BK at that time.

  28. Shawn and Rebecca

    Thanks Brian. As of right now, we make just over the median to qualify for chapter 7- but I was laid off and my husband works for automotive so that could change. -We haven’t been late yet- but are going into debt to pay the mortgages -we cant afford the house. We have 2 arms- bank wont refi/modify, 50% upsidedown…. it is a sinking ship. If we do the short sale you mentioned you wouldn’t worry about the 1st- do u think it is unlikely they will sue? Our feeling is if we could get out with limited credit damage and not foreclose or have to file chapter 13 it would be better and responsible. We really appreciate your feedback. thanks. We were afraid to foreclose we have 2 small kids- just want to get out and move on without bankruptcy. We know we will have to pay something- but hopefully not 155k plus. Thanks again - you are GREAT!

  29. Brian,
    This video really helped me. I’ve been stressed out over several things in my life lately, and this video has relieved some of that stress. At least I’ll know, if they approve my “Short Sale”, what I can expect may happen at closing. You really help people like myself, and give us good information, that seems no other sites answer, like yours does.
    I really appreicate it.
    thanks,
    Bonnie

  30. Louise

    After 3 years on the market and watching the value on our home decrease we now have a offer> not bad only $20,000. less than what we owe. The bank is reviewing and I’m pretty sure will except the offer.
    We live in a non-recourse state that doesn’t allow deficiency judgments after foreclosure.
    Does this also apply to short sales?

  31. hi, brian my name is Lida and my family and i are about to loose the one thing that we have worked hard for and invested in for 7 years, our home. Our only option at this point, to make things better for my families sake, is doing a short sale on our home.
    This is my story; in 2007 my husband and i decided to take a big step and convert our single family home into a 2 family home. turning our basement into an apartment. We made a $75,000 credit line with Chase bank and began the process of doing the construction of what we thought would benefit our income. In order to payback this credit line we had to change the status of our first mortgage with EMC mortgage. This is called an arm payment, which means we would have to choose from either making a payment less then our interest, interest only, or interest plus principle. We chose the first, paying less then our interest. We thought this would only last a year, as soon as all the construction was finished. But we were very wrong in that assumption. The construction company we contracted to do this for us never finished the job. They began the construction, tearing down our first floor walls and damaging our whole first floor as well as our drive way and yard. The contractor stopped working on our home and left it damaged and completely destroyed. This brought the price of our home, plummeting down. The fact that the country is in a financial crisis did not help our situation. It impacted our financial problems tremendously. Now we are left with this huge debt forcing us to give up our home. My question, Brian, is i have never once been late for the arm payment and i would like to know if its in my family and I’s best interest to stop the payments and continue living in my home until the short sale is finalized or should i be searching and moving out to a new place?

  32. Tina

    Hi Brian,

    Your videos are great and extremely helpful. I bought a home as an investment property a few years ago before I got married. I have not been able to get tenants in there for quite some time. There is 450,000 left on the mortgage and other homes in the area are appraised at 250-300. I don’t want to go into foreclosure (considering calling the bank to reduce monthly payments but understand that the balance would remain the same and it would take like 40 years to pay it off) and am considering a short sale. Here are some of my concerns:

    1. I am a teacher so I have a secure job. I don’t make a lot of money but it is steady income. I got married this past July and my husband has a good job (makes over $100,000). Do the banks look at our combined income to see if we qualify for a short sale. And how is my husbands credit and assets going to be affected?

    2. How long does a bank give you to do a short sale?

    3. In regards to a short sale deficiency balance, does the bank look at your current income, and if my case, our joint income to determine which of the 3 options it may take. The bank we have is GMAC.

    4. How long does a short sale stay on your credit. How long does a foreclosure stay on your credit?

    Thank you so much!
    Tina

  33. Chris

    Hey there- just found your website.
    We short saled our house 1 year ago and are repaying a soft note. What happens if we stop paying it back? We are still insolvent and just can’t pay it on top of everything else. Any options??????
    Please help-

  34. Chris,

    If you cannot afford to pay the note then it will go delinquent. The creditor may or may not be reporting the payment history on that to the Credit Bureaus.

    Usually once these soft notes are established, they are transfered to a different servicing division. So you could always try to “renegotiate” the note again. As in if your note was for $45,000 you might try to settle it for a one-time cash settlement of $4,500. Kinda like short sale round 2.

    If they are not flexible to work something out with you and the note goes bad they could sue for wage garnishment and such. If the amount is small ($5,000 or less) they often won’t bother because of the attorney’s fees. If it’s a larger sum they might feel it worth their while to pursue.

    In either case, when pushed to the wall like this, many will file for BK and get it wiped out for good. They feel that a BK sucks, but it’s not as bad as a foreclosure where credit is concerned. Lesser of the two evils is how they look at it.

  35. Tina,

    Here are some quick answers:

    1) Your combined assets may or may not be brought into consideration when doing a short sale. Depends on the bank. If you are the sole borrower on the loan you can usually get away with only you. Of course, if you have joint checking/saving accounts that show large sums of cash stashed away, that could change the picure.

    2) The bank will typically give you as much time as you need to do a short sale…until the foreclosure process is completed. They’d rather have it taken care of before they take it back into inventory if at all possible.

    3) The bank will probably look at your income alone if you are the only one on the loan when determining whether or not to assess a deficiency balance.

    4) Like EVERYTHING else on your credit profile, a short sale (if they tag it as such when the trade line is closed) will be on your credit report for 7 years. That’s really the wrong question though. What you should be asking is: “How long will a short sale WEIGH on my credit report vs. a foreclosure?”

    When a trade line is closed after a short sale, the bank can choose to report it as “settled for less than amount owed”. That tag will typically have a significant score impact for 12-24 months after which time the impact is minimized. You cannot get a new FHA mortgage for 36 mos after a short sale, 24 mos conventional.

    Overall recovery is faster if this is your only hit and you have plenty of other on-time tradelines boosting your credit profile.

    A foreclosure on the other hand will have a significant impact on score for 3-5 years before the weight drops off. It’s usually an extended-stay mark that lasts for a full 10 years instead of the standard 7 as well.

    A foreclosure is the “Atomic Bomb” of all credit events and significantly worse than a Chapter 7 Bankruptcy. It’s usually best to avoid it at all costs.

  36. Lida,

    I’m sorry to hear about your difficult situation. It’s difficult to give you advice on this one…and I dunno if it’s my place. All I can tell you is what I would do in your situation.

    Being that your house has suffered significant damage due to a series of unfortunate circumstances combined with current financial struggles I would probably stop paying and try to arrange for a short sale.

    Once that decision is made, it wouldn’t make sense to keep making payments because it just discourages the bank from taking your situation seriously. Also, as it’s a short sale, you will never see that money back again in any way/shape/or form.

    I would look to RENT a nice place right now. The housing market is not at the bottom, so it makes sense to rent right now and let someone else take the depreciation while credit recovers and it make sense to buy again.

    Doesn’t make sense to buy now unless you find the right house at the right price. Then it always makes sense to buy. Homes are not like stocks. The “spot value” of a home is not the real value. But I’m getting off-topic here.

  37. Louise,

    I dunno if it applies to short sales or not. You might want to check with someone that is local. A Realtor that specialized in Short Sales in your area should know. Real Estate Attorney’s usually know too.

  38. Tina

    Hi Brian,

    This is the most helpful video ever found as I have been seeking help from my lender but find “lender” not helpful at this point;). Also seeking help from friends who already have their homes foreclosed. I am behind 1 payment wtih my hawaii home. Looking at better options to walk away with little thousands to pay and okay credit. Although I want to save my house but paying rent, and mortgage is out of my budget right now. I have renters in my home but paying way less than what the mortgage is worth so I have to come out with $ to even out mortgage. Sounds like short sale is the way to go;). Not fully understand the BK option as I heard credits will be hunting me the rest of my life? So as foreclosed?

  39. Tina,

    Most of the credit experts agree that a foreclosure is far more damaging than a BK so if you have to choose between the lesser of two evils, BK tends to be the way to go.

    Of course this is different for each unique situation. If you consult a BK attorney they can usually give you good advice.

  40. Jenny

    Thanks a bunch - hugely helpful!!!

  41. Terrin

    I thought I’d chime in. I am both a Bankruptcy attorney, and somebody who is way upside down in a house I bought with an ex-girlfriend three years ago. I wasn’t an attorney at the time I bought the house.

    I just got a Bank of America short sell approval letter. I live in Michigan, where a deficiency balance can be pursued. Bank of America in the letter specifically reserves the right to pursue the deficiency. I’ve talked to a few managers and the Bank doesn’t look like it is going to give up it’s right to pursue the deficiency.

    That puts me in a funny spot that many other people might find themselves in. Part of what makes people eligible to file a Chapter 7 Bankruptcy is that the person’s necessary expenses and income sort of have to cancel each other out. You can’t have more then like a hundred and fifty bucks left over at the end of the month. Once you give up your house in a short sale, you give up one of your biggest necessary expenses: namely your mortgage (as well as related expenses). So, I am eligible to file Chapter 7 Bankruptcy right now because I have such a large house payment in comparison to my income. If I accept this short sale, I no longer can use the mortgage payment to make myself eligible to file Chapter 7.

    So, if a get sued in the future, I probably will not be able to file Chapter 7. Worst, I will have given up the year worth of time I can live in this house free.

    In my case, what would be useful to know is does Bank of America actually sell the debt to collections. If so, how hard does the collection agency pursue the issue. I understand that first mortgages don’t usually come after you, but that doesn’t mean the collection agency doesn’t.

  42. Bob

    Once the bank accepts my offer, will they give me somthing in writing saying the terms, before I have the new mortgage completed? (im dealing with HSBC) They said they would accept my offer, and they are asking for a HUD 1, Will they give me somthing in writing first?

  43. Bob,
    The bank will have to give you a “Demand Letter” that spells out the terms of the agreement. Your title company won’t close the transaction without this.

    Unfortunately, as I brought up before, it’s not always possible to get them to put in writing that they “absolutely will not” ever pursue you in the future for a deficiency balance…but you should read my previous comments on this topic to get my take on that.

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