Please be advised we are not attorneys nor are we CPA. This is intended to inform our clients about potential risks. Clients should seek the advice of a qualified attorney or CPA for their specific situation.
Some banks are following the lead of Bank of America and are not waiving their right to pursue a deficiency judgment against the sellers of the property when approving a shortsale. Normally, a bank has the right to go to court and obtain a deficiency judgment for up to 5 years against a seller that completes a short sale and does not satisfy the entire mortgage note. This is true also for foreclosed properties. Timeframes can vary from state to state and even if the lender has the right to pursue, many may not.
In the past many short-sales stipulated as part of the agreement that the bank would not pursue this judgment and would instead accept the reduce amount as payment in full. Recently, Bank of America and Countrywide Mortgage (owned by BofA) have changed their policy and are informing clients that they are withholding their right to pursue these judgments in the future.
This does not mean that they WILL, just that they reserve the right to pursue. It still costs them money to pursue the seller and if a seller is selling because they have no money/assets and are unable to afford the property, it wouldn’t necessarily make sense for them to pursue when they have little to no chance of collecting. Still many would be short-sellers are now wondering what to do with this new change and how this will affect you.
If you are considering a short-sale you should understand that this change while inconvenient is not necessarily a deal breaker. Since the bank has the right to pursue a deficiency judgment in a foreclosure or a “turn-in” nothing has really changed. The only impact this has is whether you get the best deal possible for your property. You should realize that typically a short-sale brings in more money than a foreclosure or auctioned property. Other costs you may want to consider are the homeowner's associations, property taxes, utility bills, lawn service, and other costs that may be added because of the maintenance of the house. The sooner you get the house out of your name, the sooner these are not your responsibility and they cannot longer continue being added to the deficiency.
Therefore, the size of the deficiency is typically LESS for a short-sale than a foreclosure / auctioned property. If the bank decides to pursue a deficiency judgment against you it’s possible that you would owe substantially less if you agree to the short-sale than if you let the bank take your property.
If the bank does pursue, it may be possible to declare bankruptcy or some other form of protection and have this reduced or eliminated in the future.
It is however important that you only consider a short-ale if your only other alternative is foreclosure.