Navigating Short Sales

Real Estate Influence
March 15, 2013 — 910 views  
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A short sale can be defined as the sale of any real estate property that results in proceeds lesser than that of the outstanding balance on the mortgage taken against the property. The difference between outstanding balance on the mortgage and the amount obtained through a short sale is called deficiency. When a short sale takes place, it need not always guarantee that the borrower will be free from the obligation of remitting the deficiency. The outstanding deficiency balance can only be waived whenever the short sale takes place under the Home Affordable Foreclosure Alternatives Program (HAFA) or alternatively if the lender agrees to forgive the deficiency, which is highly unlikely.

Recovering the Deficiency

In the case of a foreclosure or a short sale, a lender can pursue the borrower for a significant period of time to recover the deficient balance. In majority of the states, the lender can seek a personal judgment against the borrowers to recover the deficient balance. This may be collected by levying the borrower’s account or his wages.

Avoiding a Deficiency Judgment

The best and probably the most popular method you can use to avoid a deficiency judgment is by using the HAFA program to complete the short sale. Filing a Chapter 7 bankruptcy is also another method that can be used to waive your debts in a deficiency judgment. Under Chapter 7 bankruptcy, the court appointed trustee may cancel your unpaid debt or liquidate your assets to make payments to your creditors/lenders. 

The MHA or Making Home Affordable Program is a novel initiative of the U.S. government to stabilize the real estate market by allowing borrowers to avoid foreclosure and get relief from paying the deficiency balance. If your lender is not a part of this program, then you will not get the advantage of having your deficiency balance waived. In such a case, your only option to safeguard yourself from a deficiency judgment is to file for Chapter 7 bankruptcy. Lenders generally provide a 1099-C form to the borrowers who file for bankruptcy instead of paying the mortgage deficiency balance. This generally allows the lender to offset the losses derived from a foreclosure or a short sale.

About 1099-C

When the borrower receives a 1099-C form which indicates a cancellation of debt, he faces two choices. The first is to pay income taxes on the 1099-C Form, as the debt amount canceled is considered to be an income. The second option for the borrower is to take advantage of the Mortgage Forgiveness Debt Relief Act, to get relief from paying taxes on the canceled debt.

Borrowers who can have their mortgage debt balance eliminated or reduced receive the 1099-C form at the year end from their lenders. This form would contain information regarding the amount of deficient debt that has been forgiven and the fair market price of the property subjected to a short sale. It is a borrower’s responsibility to check the validity of all the information available on the 1099-C form and he must notify the lenders immediately if any discrepancies are found.

Real Estate Influence