Deficiency Judgement - Posted by Lachin

Real Estate Investing Real Estate Law
1

Posted by Keith on February 19, 2006 at 12:08:10:

I think you are mixing several different scenarios.

If he sells you the house for what is owed to the mortgage company, the mortgage company would not have a deficiency to pursue. They would be paid off in full and be out of the picture.

If you negotiate a Short Sale with the lender, the lender would not get the full amount owed, and the seller may have to report cancellation of debt income on their tax return (and pay tax on the forgiven amount) which is the difference between what is owed to the lender and what the lender actually received.

If you purchase the home at an auction the seller is already out of the deal so you wouldn’t need his consent for anything. This is where the lender would possibly pursue a deficiency judgement when the home sells for less than what is owed. Chapter 7 would probably wipe out the judgement, as well as the COD income in the previous scenario, but that I don’t know for sure.

Sounds to me like you are trying to do Short Sale with the lender BEFORE the auction in which case the seller could be subject to the cancellation of debt income. I think there is a slim chance you are going to find any lender to sign off on not pursuing a deficiency OR issuing COD income under any scenario.

Keith

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Deficiency Judgement - Posted by Lachin

Posted by Lachin on February 16, 2006 at 21:43:59:

Hi,

My owner filed for chapter 7 BK and it got discharged.
His house is going to a foreclosure where the sheriff’s sale is 30 days away. He says (because of his Chapter 7 BK) he is not responsible for a deficiency judgement if people pay less than the mortgage balance on the auction. Is this true?
Does chapter 7 give you such an immunity?

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Debtor’s state law - Posted by John Merchant

Posted by John Merchant on February 19, 2006 at 17:35:37:

Deficiency judgment law varies from state to state, and your state’s statutes should be carefully examined to see what THEY say.

e.g., in WA, a residential loan foreclosure wipes out the bank’s right to sue on any debt or defiiciency, so they couldn’t sue even if they wanted to.

And remember, while a Ch 7 discharge does discharge all debt, it does not remove or discharge any lien such as D/T or mortgage.

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Re: Deficiency Judgement - Posted by dealmaker

Posted by dealmaker on February 17, 2006 at 09:42:24:

Not sure what you mean by “my owner”, but; deficiency will be made up (partially or wholly) by PMI or MIP (if it’s FHA loan). I don’t recall what the rules are but in one case it’s INSURANCE which he bought so the insurance proceeds are not taxable income. Also it would make a difference whether or not the house was included in the BK, it sounds like it wasn’t.

What is your relationship to this owner/deal?

dealmaker

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Re: Deficiency Judgement - Posted by lachin

Posted by lachin on February 19, 2006 at 24:05:51:

I just met him to buy his house. He wannts to get rid of the house (No money for him). He agreed to work with me if and only if I can get a letter from the bank that says they would not seek the deficiency judgement. Is there such a document you can send me that I can use to make bank sign it.