How a Deficiency Balance Can Affect You

Bills.com Team
Pro

By

Highlights


  • Understand what a deficiency balance is.
  • Review what may make you responsible for a deficiency balance.
  • Examine the potential tax implications that come with a forgiven debt.
4.0
/5.0
(11 Votes)

Some lenders may forgive a deficiency balance on a mortgage, but not all do.

Even after closing out your loan with your lender, through either a short sale, deed-in-lieu of foreclosure, or a foreclosure, your problems may not be behind you. Depending on the original terms of your loan as well as the state you live in, you may end up with a significant financial liability or a tax liability. You may owe your former lender(s) if the sale proceeds did not pay the entire balance you owed on all loans that were secured by your property. The difference between what you owed and what the home sold for is called a deficiency balance.

Some lenders may forgive a deficiency balance, but not all do. It is often an unsound economic decision for a lender to sue you for the deficiency balance. For one, you may not have any resources to pay them. You likely would not have defaulted on your mortgage if you could have afforded to pay it.

Some states protect their citizens with anti-deficiency laws. Rules vary from state to state.

Non-Recourse or Recourse Loan

An important factor in whether you can be liable for a deficiency balance is whether your loan is a non-recourse loan or a recourse loan. A non-recourse loan restricts your lender’s ability to collect on your defaulted loan to the assets used to secure the loan. For your mortgage loan, it is likely that the home itself was the only security. If you have a non-recourse loan and your lender forecloses on you, then it cannot get a deficiency judgment and attempt to collect on it. It can only sell the home and keep the proceeds.

Most non-recourse loans are restricted to loans used to purchase a primary residence. If your lender foreclosed on your investment property or vacation home, you likely are liable for the deficiency balance. You could also be liable for the deficiency balance if you had taken out a loan on a primary residence and the home was no longer your primary residence.

A recourse loan is one where the lender has the legal means to collect the deficiency balance from you. Your lender can pursue collections, including suing you to get a deficiency judgment against you, which can lead to a levy on your wages. Your lender can also sell or assign the debt to a collection agency that can come after you to collect on the debt. Your lender may or may not decide to pursue collections, if it has the legal authority to do so. There is no sure way for you to know. Lenders realize that if you went through a foreclosure or short sale that you may have a severe financial hardship which makes collecting on the debt difficult. If your lender takes the time, expense, and effort to get a judgment against you, it may never be able to collect. Therefore, it may not even pursue collecting in the first place.

Some states are non-recourse states, while other states are recourse states. In non-recourse states, your lender generally cannot come after you for any balance that remains after the proceeds from the sale of your primary residence home are applied to your outstanding mortgage debt. Still, even within non-recourse states, things are not black and white. Loans that were not used for purchase money can become a recourse loan even in a non-recourse state. Check the terms of your loan. In fact, it is a good idea to know whether your loan will be a recourse or non-recourse loan, before you take out the loan.

Tax Implications

In some cases, you lender my write of the debt, deciding instead of trying to collect it from you. A debt that your lender wrote off can result in a tax liability for you. A 1099-C is a notice to the IRS that the financial institution has forgiven or canceled a debt of $600 or more. If the financial institution issues a 1099-C to you, then it has forgiven the debt and you must report the dollar amount shown on the 1099-C as income on your income tax return. Fortunately, the Mortgage Forgiveness Debt Relief Act of 2007 allows taxpayers to exclude income from the discharge of debt on their principal residence. The forgiveness is restricted to mortgage debt that you incurred to purchase your home. If you took out cash from the equity in your home in a refinance, as many Americans did during the real estate boom period, you are not covered by the Mortgage Forgiveness Act. Even if you cannot use the protections of the federal act, you may still be able to avoid declaring the dollars listed on the 1099-C. Check with a CPA, tax attorney, or tax professional to see if you meet the IRS rules regarding your assets and liabilities and can use the IRS Form 982 to avoid declaring the 1099-C as income.

If the financial institution issues a 1099-C to you, it will probably not pursue you for the deficiency balance because it has deducted the loss on the loan from its taxes. However, there is no guarantee the financial institution will not pursue you for the deficiency balance and then later amend its tax returns.

Negotiate

Consider negotiating with your creditor in an attempt to reach an out-of-court settlement on the debt. The good news here is collection agents purchase deficiency balance collection accounts for 1 or 2 cents on the dollar. (This is in contrast to credit card collection accounts, where the industry standard is 6 or 7 cents on the dollar. If necessary, enroll the debt in a debt negotiation program. (Go to the Bills.com debt relief savings center for a no-cost quote.) Another option is to negotiate the debt yourself. Consider opening negotiations at 5 cents on the dollar for a lump-sum settlement. This amount may sound small, but given the fact the collection agent bought the collection account for a penny or two on the dollar, this amount gives the collection agent a handsome return on their investment.

Summary

If a creditor pursues you for a deficiency balance, make sure you understand which financial and tax responsibilities can follow you, even after you lose or sell your home. Speak with an attorney or a tax specialist to your rights and liabilities under your state's laws. The last thing you want is for a problem you thought was behind you to rear its head with IRS collection notices or a wage levy from a judgment an aggressive creditor obtained.

4.0
/5.0
(11 Votes)

61 Comments

Recent Best
1500 characters remaining
  • 35x35
    Oct, 2012
    Sheila
    I'd like to hear your comments on deficiency balance responsibility on the foreclosure of an investment property in Washington State. In other research I've done online it appears to me that if our lender chooses to foreclose non-judicially they cannot come after us for deficiency even though this is a rental. I understand that we will have tax liability but right now I'm interested in the deficiency balance. Although the rental property is in Washington state our primary residence is in California. Washington laws would apply right? Thanks.
    0 Votes

    • 35x35
      Nov, 2012
      Bill
      Because the land is situated in Washington, Washington foreclosure law applies despite your residence elsewhere. My exposure to Washington law is limited, so therefore you should consult with a Washington lawyer who has experience in foreclosure law to receive guidance.

      According to the 2011 paper Recourse and Residential Mortgage Default: Evidence from U.S. States (PDF), Washington has the following rules regarding mortgage deficiency balances:
      “Lenders may foreclose through either a judicial or non-judicial process. If the lender wishes to pursue a de…ciency judgment, however, it must pursue judicial foreclosure and pursuit of a de…ciency judgment triggers a 12-month right of redemption. Furthermore, the judicial foreclosure process is substantially more time-consuming than the non-judicial process. Deficiency judgments can also not be obtained if the property has been abandoned for 6 months or more which we view as one way a strategic defaulter could evade a deficiency judgment relatively easily. We classify Washington as a NON-RECOURSE state. The relevant statutes are in Title 61, Ch. 61-12 of the Revised Code of Washington.”
      You asked if Washington's anti-deficiency rule applies to owner-occupied property only, or if it also applies to vacation/investment property. Excellent question. In a brief search, I was unable to find court cases on this point. This brings me back to the second point in my reply — consult with a Washington lawyer. Please return here and share what you learn.
      0 Votes

  • 35x35
    Aug, 2012
    Tracy
    I received a demand to pay letter from a FL lawyer regarding a 2nd mortgage originally held by Bank of America for a VA contract. My 1st mortgage was also held by Bank of America. My house was foreclosed in June of 2009. The 1099-A only reflected amounts regarding the 1st mortgage. We attempted a short sale with the bank before foreclosure. The Realtor submitted a buyer's offer twice to no avail. The offer was for $20,000. more than the payoffs for both loans but after agent commission etc there was still a $10,000. balance. A negotiator never contacted us. It was an automatic denial. They were too inundated with processing apps to even deal with the housing crisis. The buyers got early entry but the demand letter does not reflect any rents the bank may have received. The buyers still attempted to work with Bank of America after the foreclosure to no avail. The FL lawyer is threatening to obtain judgment under FL law. This was a VA contract for both mortgages. Don't they have to sue me under VA law? Am I entitled to get a value determination on a second mortgage deficiency held by the same bank to see if I can get out of the deficiency? The city assessment at the time of foreclosure was more than enough to cover the payoff amounts for both.
    0 Votes

    • 35x35
      Aug, 2012
      Bill
      When you write "VA," I assume you mean "Virginia" and not "Veterans Administration."

      Virginia does not have an anti-deficiency law. If a deficiency remains after the sale of the land securing the debt, the creditor can file an action at common law based on the original contract and receive a judgment for the unpaid amount. I do not see how a Florida court would have personal jurisdiction over a Virginia or West Virginia resident in the situation you described. The only way it could would be if the mortgage contract you signed stated words to the effect of, "If there is ever any dispute that arises from this loan, we agree to litigate this is Florida," but that seems unlikely. If the Florida lawyer bought the collection account from Bank of America, he or she is functioning as a collection agent. Under the Federal Debt Collection Practices Act, a collection agent must file an action against a consumer in a court convenient to the consumer. If the lawyer knows the law, it is unlikely he or she will file an action against you in Florida.

      The lawyer violates the FDCPA by threatening legal action he or she has no plans to carry out. My advice? Consult with a lawyer in your present state of residence about formulating a possible defense against any action taken by the lawyer. Be sure to bring any documents you have regarding Bank of America's refusal to consider a short sale. If you can show the bank was negligent in not allowing a short sale, you may be able to argue you owe the short sale deficiency amount, and not the deficiency that resulted from the foreclosure.
      0 Votes

  • 35x35
    Jun, 2012
    Leslie
    We were foreclosed on in 2005 on our primary residence in Indiana. We have been making payments on a deficiceny deficit since, under the constant threat of being taken to court for a wage garnishment (the court date is re-scheduled every 90 days). Recently, the leagal assistant representing the mortgage company has stated that we must attend court because of 2 returned check payments. The checks were cleared through our bank and the payments were made. The LA asked for us to send our bank statement so the bookeeper could look it over, based on the bookeeper's decision of whether or not the payments were made, the LA will decide if we have to appear in court on July 3, 2012. Stating also that the bookeeper is only in the office on Weds and Thurs.--We do not want to go to court, we have been paying for the last 7 years. We had written and asked the LA to ask the lender if they would now consider a 1099-C, the LA never responded to that request. We are financially strapped. We don't know what to do at this point and feel extremely threatened and afraid of going to court. Should we seek legal advice ourselves? Can we request that the court date be continued, so that we can have time to research our options. We believe the LA is being extremely aggressive and threatening. Please advise! We do not own a home now, we rent!
    0 Votes

    • 35x35
      Jul, 2012
      Bill
      I would be interested to learn if the creditor has a judgment in hand against you. If it does, then the threats of wage garnishment are real. If it does not, then the garnishment threats are hot air.

      Keep in mind the legal assistant has a job: Cajole you to make payments. If that means being aggressive, so be it.

      Time to level the playing field and hire a lawyer who has experience with real property. I am loath to suggest the following, but the circumstances you described give me no choice: When interviewing local lawyers, consider choosing the one with the most aggressive negotiation style. Customarily, a collaborative, collegial negotiating style works best for all parties. But when faced with a mad pit bull negotiator, you need to be armed equally.
      0 Votes

  • 35x35
    Apr, 2012
    Trish
    Hi I live in Ohio and am getting ready to do a short sale and they mentioned sending me a 1099-C and I have been trying to find out if Ohio is a debt forgiveness state or not so I know if I would have to pay taxes on this money or not. I did refinance the house once and paid off credit cards so I don't know how this would affect the 1099-C. If I have to pay taxes on this as income I am better off letting them foreclose and file Chapter 7 bankruptcy. Any help you can offer would be appreciated.
    0 Votes

    • 35x35
      Apr, 2012
      Bill
      Homeowners face two potential issues following a short sale or foreclosure:
      1. Deficiency Balance: If the property sells for more than the balance of the loan, the difference between the two is call a surplus. If the property sells for less than the balance of the loan, this is called a deficiency. Some states have anti-deficiency laws that bar a lender from trying to collect the deficiency balance from the borrower. We summarize each state's laws on the Bills.com Anti-Deficiency page.
      2. Forgiven-Debt Income. If a financial institution that lends money as its business forgives or cancels a debt worth more than $600, it must issue a 1099-C, and the borrower must declare this as income on their tax return. However, the Mortgage Forgiveness Debt Relief Act and CODI can be used to cancel this imputed income.

      Note that a state's anti-deficiency laws and the Mortgage Forgiveness Debt Relief Act concern the same thing — a mortgage deficiency balance. However, the state law focuses on collecting the debt, and the federal law focuses on the federal income tax implications.

      You asked about bankruptcy and mentioned Ohio. Consult with an Ohio lawyer who has bankruptcy experience to learn more about your rights and liabilities, and whether you qualify for a chapter 7 or chapter 13 filing.

      0 Votes

  • 35x35
    Apr, 2012
    Tom
    If I settle on a second mortgage on my primary residence and still live there, is the difference between the settlement amount and amount owed taxable? Or, can this difference be forgiven and not be reported as income?
    0 Votes

    • 35x35
      Apr, 2012
      Bill
      Two questions:
      1. Was the deficiency balance forgiven? If yes, then the Mortgage Forgiveness Debt Relief Act may apply.
      2. Was the second used to buy, build or substantially improve your principal residence? If so, MFDRA applies.

      Follow the link just mentioned to learn more. You may need to file a Form 982 with your tax return.

      0 Votes

  • 35x35
    Mar, 2012
    Phaedra
    I live in Wisconsin. My home has lost considerable value and I am currently underwater. The balance of my mortgage is $115,000 and I was advised my home was worth $45,000 in 2011. In March 2011 I contacted my lender regarding a Short Sale or Deed in Lieu of. I was advised they would not consider the Deed in Lieu of unless I had attempted the Short Sale first. I placed the home on the market for $45,000. My lender had an independent appraiser look at the house and advised it was worth no more than $40,000. The lender denied the Short Sale. I have other debts totaling over $160,000 so I filed Chapter 13 and advised the lender that I did not want the home and they gave me the impression they would move forward with the Deed in Lieu of. I vacated the property June 2011 and moved to a rental. The bankruptcy court granted my lender a stay in June 2011, so I believed that they would eventually take possession of the home. I learned in November 2011, (and not from my lender who never bothered to contact me), that they had made a business decision not to foreclose, they wrote off the loan and the home was still in my name. I however no longer wanted the home or the resposibility (and apparently neither did the bank). The lender suggested I do a short sale. I explained I had already attempted that earlier and they had refused. In the 9 months that the home has been vacant the value has continued to decline. I had it listed again, this time at $29,900. My question is this: when the home sells, there will of course be a deficiency balance, since I filed Ch 13 and orginally listed the lender, can they attempt to collect the remaining charged off balance? I feel that some of the actions taken by my lender were not above board, do I have any recourse? The recently received an offer of only $11,500 which I am going to accept, just to get the home out of my name, but in your opinion, do you think the lender will say no or were they just forcing me to do the leg work of getting rid of the house?
    0 Votes

    • 35x35
      Mar, 2012
      Bill
      Consult with your bankruptcy lawyer about the settlement the lender offered. As a person under chapter 13 protection, any settlement you make with one of your creditors outside of the chapter 13 process may kick you out of the chapter 13 and expose you to liability and court sanctions.
      0 Votes

  • 35x35
    Feb, 2012
    shawn
    I am a homeowner in CA who is underwater. I will try to be brief... We bought our home in 2004 with an 80/20 loan situation. After 1 year, we refinanced to consolidate the loans and improve the terms to a 30 year fixed interest rate. We did take a bit of money out when we refinanced in order to do some home improvements. Now, 8 years, and 2 extra kids later, we have outgrown our home and need to move. We are trying to explore all our options. We are presently considering purchasing a new home (we are preapproved...) with an FSH loan, then attempting to short sell our home. I am having a hard time understanding if the mortgage forgiveness act and CA SB 458 will protect us. If the loan non-recourse loan, I am under the impression that our additonal assets (ie: new property) would not be at risk. If the loan is a recourse loan, would our assets be at risk? ...even in CA? Finally, if our loan is a recourse loan and the above protections do not apply to us, and we do not proceed with purchase of another property, what are our options? Does a homeowner with a refinanced loan that is underwater have ANY options of getting out of their property?
    1 Votes

    • 35x35
      Feb, 2012
      Bill
      Please see the Bills.com article Is My HELOC a Recourse or Non-Recourse Loan in California?, which discusses California's anti-deficiency laws in some detail.

      Let me cut to the chase, as it were, and give you a short answer: In California, if you refinance a home loan, you lose California's anti-deficiency protection. Here, you mentioned a refinance, which is a recourse loan in California.

      If a lender forgives a deficiency balance, then the Mortgage Forgiveness Debt Relief Act, a federal law for federal income taxes, and the California version for California income taxes, both apply. However, that assumes the lender forgiving a deficiency balance, which you should not take for granted.

      Your best option? Buy the new home and short sale the second, in which you negotiate with the lender in an attempt to convince it to forgive the deficiency balance. Explain that if it does not, you are prepared to file for bankruptcy, which will discharge the deficiency balance.
      0 Votes

    • 35x35
      Feb, 2012
      shawn
      Thanks for your reply! One more question...if you end up in the "worst case scenario" having to file for bankruptcy, do you lose the second house?
      0 Votes

    • 35x35
      Feb, 2012
      Bill
      Let us assume the following chain of events:
      1. Borrower owns House A with current home loan payments
      2. Borrower buys House B
      3. Borrower tries to sell or short-sell House A
      4. Borrower short sells House A (or allows a foreclosure), and Lender does not forgive the deficiency balance
      5. Lender pursues Borrower aggressively and files a lawsuit
      6. Court gives Lender a judgment
      7. Lender threatens to use judgment to garnish Borrower's wages, place a lien on House B, and levy accounts of Borrower
      8. Borrower files for bankruptcy, and qualifies for chapter 7
      9. Bankruptcy trustee discharges Borrower's debts, including the judgment
      10. Borrower continues to pay home loan payments, but does not reaffirm mortgage/deed of trust

      The Lender for House B has the ability to foreclose if Borrower stops making his or her monthly payments, just as it did before the bankruptcy. However, Borrower does not have personal liability for the home loan, nor will the home loan appear on his or her credit report.

      Borrower's bankruptcy does not result in foreclosure if Borrower continues to make their monthly loan payments as agreed to in the loan contract.

      0 Votes

    • 35x35
      Feb, 2012
      shawn
      Thank you! Great information!
      0 Votes

    • 35x35
      Feb, 2012
      Kenneth
      We're in kinda the same position. We're in California and we're trying to do a deed in lieu on a property in which we have a 1st and a 2nd that have both been refinanced. Our deed in lieu paperwork from the lender only applies to the first loan and the lender claims to have written off the 2nd. They say that there will be no collection attempts on the 2nd but they won't provide any paperwork that that effect. The 2nd is 74k. Should we believe them or do a short sale instead?
      0 Votes

    • 35x35
      Mar, 2012
      Bill
      Whether you do a short sale, deed-in-lieu, or simply walked away, is there enough value in your home to pay anything to the second mortgage, after the first collects as much as it is able to collect? If not, trusting them is all you can do.
      0 Votes

  • 35x35
    Feb, 2012
    Wendi
    Question: I an currently undergoing foreclosure. I had two loans on the property. In a twist of fate, my first loan servicer purchased my second loan servicer. In June 2011, the second loan servicer cancelled my debt and issued a 1099-C. Then they were purchased in later 2011 by my first loan servicer. Now, I have gotten a 1099-C form from the second lender, but the first lender is sending me bills demanding that I pay the second loan (the amount that has been cancelled) along with the first loan. I already know that I will not incur taxes on the cancelled debt, but I was just wondering if my first lender coming after me for my second lender's cancelled debt is normal?
    0 Votes

  • 35x35
    Feb, 2012
    Larry
    The short sale on my primary residence in IL closed in April 2011. The debt was forgiven on the 1st through BOA but I had a HELOC with Wells Fargo that wasn't forgiven for 30K. I attempted settlement but couldnt reach an agreement, which one of the reps tried since the debt was now unsecure but no luck. Wells has since sold/assigned the debt to a collection agency a few weeks ago. Since I no longer own the home I wanted to know what actions if any the collection agency can take against me?
    0 Votes

    • 35x35
      Feb, 2012
      Bill
      You mentioned Illinois. See the Bills.com resource Illinois Collection Laws for a discussion of your rights and liabilities.
      0 Votes

  • 35x35
    Jan, 2012
    Qinah
    They foreclosed on our rental property in October 2010. The mortgage was split between two banks (80/20). Bank 1 foreclosed and got the property. Bank 2 has a remaining balance, which was not delinquent at the time of foreclosure but we owe what I now know is called a deficiency balance. We have since "refinanced" into what I am assuming is just a regular 'personal loan' for the balance. We have been paying faithfully. My question now is...are any of these payments tax deductible since there is no RE interest or taxes to be gained from it?
    0 Votes

    • 35x35
      Jan, 2012
      Bill
      Mortgage Interest is tax deductible for qualified homes, as defined by the IRS. Once the mortgage is paid off, including through a foreclosure, your unsecured loan is not eligible for a tax deduction.

      However, I would like to add two points. Your mention that the property was a rental property, and not all rental properties are qualified homes. See the IRS publication 936 for more information. If the mortgage interest was deductible, upon paying off the mortgage, there may be prepaid points that are eligible for deduction.

      In any case, I recommend that you consult with a tax professional.
      0 Votes

  • 35x35
    Nov, 2011
    Marie
    I had a home that was foreclosed on Florida. Here are the facts and then my questions. FACTS: 1. The home was foreclosed on in July, 2009 as reflected in the Final Judgement. 2. A Certificate of Title was filed in November, 2009 and sold to WFB as a trustee for the mortgage company. 3. The home was sold in October, 2010 as reflected in a Special Warranty Deed. 4. My credit report still indicates the Foreclosure Process started, two years after the Final Judgement. 5. The report shows a Past Due Amount and Last Past Due Amount for 10/09, 3 months after the property was foreclosed upon. 6. The Terms shows the incorrect monthly payment amount. 7. The mortgage company still shows a balance owing, greater than the original amount of loan. QUESTIONS I contacted the Mortgage company and was intially promised correction, then they back out of that promise. I was going to dispute with all 3 CB for all of the inaccuracies. Should I supply the CB with the actual court documents? Should I just ask for simple deletion for each and every error? Thank you!!
    0 Votes

    • 35x35
      Nov, 2011
      Bill
      You will need to provide details regarding each disputed entry, with supporting documentation. Read the Bills.com article about disputing a credit report.

      According to Experian's Web site, the date of foreclosure will be based on the filing date and will last 7 years. TransUnion's site explains that the amount reported is taken from the public record, and does not change after payments are made.
      1 Votes

  • 35x35
    Oct, 2011
    Tom
    My investment property was just foreclosed upon by mortgage co Aug 31st, and I had a HELOC on the property too. The HELOC was taken first, THEN the mortgage. I am current on the HELOC. There will be a substantial deficiency on the property. Appraised value when bought was 180K, now worth 50K. HELOC is 78K, and mortgage 95K. What am I looking at down the road? The two other properties I own are way under water also, and I have no savings other than 50K in retirement account. Should I stop paying HELOC also and let the banks fight it out and decide what they will do with me? Still do not understand how mortgage co foreclosed on property when HELOC was first. confused here...
    0 Votes

    • 35x35
      Oct, 2011
      Bill
      Your confusion regarding a mortgage company in second position foreclosing before the first mortgage is understandable. However, any company with a mortgage on your property, whose loan is in default, has the right to foreclose, regardless of its position.

      It is true that it is not always economical for the second position holder to foreclose, because the proceeds of the sale will first go to the first mortgage holder and there may not be sufficient funds to cover any or all of its loan. Please read the Bills.com resource about second mortgage foreclosure.

      Regarding your overall financial position and your other underwater properties, I recommend that you consult with a bankruptcy attorney. You could also try to negotiate with your lenders. Speak about a loan modification, one that would allow you to repay all of your loans satisfactorily, or a settlement to pay the principal balance at a reduced rate. If that is not possible (due to the lender's unwillingness to negotiate or your inability to service any negotiable loan) and the lender forecloses, then you can try to negotiate paying off a deficiency balance at a reduced rate.

      If your only asset is your retirement account, which is generally off-limits to the creditors, and you wish to protect your income or any other assets from garnishments and levies, then a bankruptcy may be the best route to take, especially if you qualify for a Chapter 7 bankruptcy.
      0 Votes

    • 35x35
      Nov, 2011
      Tom
      Thank you for the information regarding the second foreclosing before 1st(HELOC). I understand what you are saying, but DONT understand what the mortgage company is doing.. Looked at my property online and condo has been sold to GMAC(the mortgage co) for $14,800! I also see that it is for sale thru a bank broker/real estate agent for 46K which is approx market price at present. I also have found out that the HELOC, which was first on the property (78K), looks like the mortgage co(GMAC) has written out any and all claims on the property on their foreclosure judgement. You said that if the second forecloses, then the HELOC would be paid off first, THEN the one who foreclosed would be paid off second, correct? Also reading thru court papers I see that mortgage company included in their paperwork to courts that the HELOC was old and already paid off and no claim is available for BOA, and was signed off on by the courts. Even though there is an outstanding 78K on my HELOC! So now what? I am ready to stop paying this BOA HELOC since it seems they have nothing to claim anymore. Also, if the mortgage company decides deficiency judgement on me, will they use the $14,800 price they just paid for the property with the county to decide the deficiency? Or the price they get when they sell it?? And if they decide to go after deficiency, will the HELOC be thrown in with it also? Know this is confusing to you, but I am even more confused of what is going on. I think GMAC as something up their sleeves for later, and I am wanting to cut them off at the pass! what is your gut feeling on this??
      0 Votes

    • 35x35
      Nov, 2011
      Bill
      I can understand why you are confused. I cannot think of any reason why the second mortgage would be paid off before the first mortgage. In order to find out whether the foreclousre process was done properly I recommed that you speak with an attorney. Please report back and let us know how you resolve your problem. This may help other people.
      0 Votes

  • 35x35
    Sep, 2011
    Mike
    Hi I have somewhat of an interesting situation. I own a condo in New Jersey. I bought it as owner occupied but had to move about a year after purchasing it to take a new job in California. The housing market collapsed shortly thereafter and the condo has been underwater for the last several years. I was able to rent it out most of the time, although being a landlord from 3,000 miles away is a bear. Up until now, I've made all of the payments, even for the almost two years that I was unemployed (I got laidoff from my job in California in 2009). I had a good amount of savings and the rental income helped cover a lot of the mortgage. Since I couldn't find a job, I started a business. While I was able to get a little bit of seed capital and make some money by working part-time on the side, the company is still a ways away from being profitable. Right now I have about enough money to cover my personal expenses and the business expenses if I don't continue making mortgage payments, and only a modest chance of getting more money after that. Meanwhile my mortgage related expenses have gone up. My HOA dues increased by 50%, my second mortgage which was interest only for the first several years is now in repayment and my taxes have increased. The end result is that my mortgage payment has increased significantly last year. Meanwhile, I haven't gotten any money from tenants in over 4 months. At this point I can't afford to maintain the condo and the business. I've reached to the bank in the past, but they don't seem particularly interested in working with me. I really need to get out of this condo, and I would like to avoid foreclosure. I have enough money to make one more payment at most, but am considering skipping it. Any advice?
    0 Votes

    • 35x35
      Sep, 2011
      Bill
      You don't say how deeply underwater you are. You can try negotiating a short sale with your lenders. You can cease making payments and see if either lender is willing to modify your loan (or do so before you miss a payment). You can also try reaching out to an organization like Hope Now. Lastly, you can contact an attorney that has experience in negotiating short sales and avoiding foreclosure.

      Some say that skipping a payment is a good way to alter the equation and gain some flexibility from a lender, but there is no guarantee that your lender will not pursue a foreclosure aggressively.
      0 Votes

  • 35x35
    Sep, 2011
    Alissa
    We purchased a home in July 2006. We had two mortgages on it from the beginning, the first large and the second small. We stayed current all payments until our first mortgage was sold to Bank of America from Wilshire. We were not allowed to make payments on the loan for several months, I believe it was 6 months, while Bank of America made it into one of their loans...we called every two weeks to see if we could make payments. We put all the payments in a savings account. I was in college, unemployed, and my husband was working. During this time he lost his job and didn't get another one for 2 months. B of A finally wanted payments, but we didn't have it all then, since we used some of it during the time of unemployment. We filled out forms for a loan modification. While waiting to hear back about, my husband became employed. They asked for more and more paperwork and updated income info...so we didn't qualify. We asked what we could do and were told nothing...just pay the outstanding balance. Then 9 months later, my husband was unemployed again. We applied for loan modification, same games with paperwork all in and then a month later paperwork was missing, husband got job, we didn't qualify and here we are. So we haven't paid on the 1st mortgage since Jan. 2008, but we have stayed current on the 2nd mortgage believing that a loan modification would be possible. Now we received info about a foreclosure and we don't know what to do...keep trying to modify(we do this every 3 months to no avail), short sale( our house is worth less than what we owe on it), deed in lieu or foreclose.
    0 Votes

    • 35x35
      Sep, 2011
      Bill
      Consult with a lawyer who has experience in litigating quiet title actions in your state. You may have a cause of action (a legal reason to file a lawsuit) against Bank of America for
      1. Its refusal to accept your payments,
      2. It failing to process your modification documents in a timely manner, or
      3. Not having the legal right to foreclose on your property

      I realize a lawyer's time is not cheap, but if you can retain your home, the money to hire the lawyer is well spent.

      1 Votes

  • 35x35
    Aug, 2011
    John
    I'm getting calls from a collection agency. I saw your article and I am now wondering what I should look into next. I had a house and a 1st with Chase. We needed $$ to pay off medical bills so we took out an equity loan also with Chase. Between the two loans I was doing OK until I had to retire due to an injury. With the drop in my income I was no longert able to meet the 1st and 2nd payments and ended up in a foreclosure. Now, 3 years later I am told by the collector I am responsible for the "Deficiency Amount." they have sent letters and have even offered a settlement, but we are still talking about Thousands of dollars (which I obviously don't have). Should I talk with a Bankruptsy Atorney..again? First time I did he told me not to worry about the 2nd, it would go away whith the foreclosure. Shoyuld I try to negotiate a settlement with te collector? BTW...I bought the house in 1995, lost it in 2008... Made many, many mortgage payments faithfully. Chase was unwilling to re-negotiate the loans back in 2007. Thanks for the info of your article. I am learning alot.
    0 Votes

    • 35x35
      Sep, 2011
      Bill
      John, I think it prudent to consult with a bankruptcy attorney. If you find out you qualify to discharge the debt through Chapter 7, you don't necessarily have to file. You have strong leverage to negotiate a settlement when the threat that you will file for BK is real. You can play chicken with the collector up until the point that a lawsuit is filed and assets or income are at risk. A BK attorney will also be able to tell you whether you face any risk for wage levy or asset seizure, if the creditor were to obtain a judgment against you.
      0 Votes

    • 35x35
      Nov, 2011
      yolanda
      I filed BK 7 1/3/2011 and was discharged 4/12/11. question very confused I moved to Sugarland TX 8/27/11, my primary was in San Bruno CA and a house in Tracy CA. Both are upside down and both have a 1st and equtiy line. San Bruno both ist and equity with Washington Mutual, now Chase. Tracy 1st with CountryWide now BofA and equity with WaMu, now Chase. What are the tax issues since i filled bk7? I am in the process of short sale for both property but i am not sure if i should short sale, deed in lieu, or foreclose. How does the BK protect me from the shortage for both properties for 1st mortgage and equity??? How can i know what is the right thing to do? How can i make sure if i do short sale there is no tax issues? I being told that since my properties are in California i am being told that there 2 laws that protect for shortages short sales are in process do what is 1099 a, 1099 c is there a way I can put in writing that i want a letter assuring before I sign short sale there will be no tax issues? Please give me your thoughts. Thank you.
      0 Votes

    • 35x35
      Nov, 2011
      Bill
      You have written a very lengthy comment with many questions dealing with foreclosure vs. other options to deal with properties underwater, such as a short sale or deed in lieu, and the tax implications.

      You mention that you just have gone through a Chapter 7 bankruptcy. I strongly recommend that you speak with your bankruptcy attorney to see what are your best options and discuss the possibility re-opening the bankruptcy and including these properties in the bankruptcy.

      Tax implications come from forgiven debt. If your debt is forgiven outside of bankruptcy, you should look into the Mortgage Forgiveness Debt Relief Act, for your primary residence, and whether you are eligible to discharge forgiven debt on a second home using the IRS Form 982. Speak with a tax professional, if you have forgiven debt.
      0 Votes

  • 35x35
    Aug, 2011
    Mae
    I bought a condo in Atlanta in 2005 and have recently stopped paying my mortgage as I could no longer afford it. My 2nd mortgage has been paid off and I owe about $113K on the 1st mortgage. The property is currently worth about $40K. The foreclosure date is set for next month. I had two short sale offers pending with my orginal mortgage company (SunTrust) but then they sold my loan to another company and the new company has no records of my short sale. SunTrust originally said the short sale did not follow thru because it was already being foreclosed. It is too late for me to find a new buyer in the time I have left. Would a deed in lieu of foreclosure be much better for me than if I just let them foreclose on the property? Does Georgia have any laws that would protect me from getting my wages garnised if there's a remaining dificiency balance after it's auctioned? I have no assets except for my 401K, do not own any other property, or even a car in my name.
    0 Votes

    • 35x35
      Aug, 2011
      Bill
      Given that a foreclosure date of some kind is imminent, it is unlikely for you to get the mortgage servicer or owner of the debt to agree to a deed-in-lieu-of-foreclosure. Consult with a lawyer in your state who has experience in foreclosures now, today, immediately to learn what rights and liabilities you have, and what options are available to you to avoid a foreclosure. Your lawyer will also explain your options for resolving the deficiency balance.
      0 Votes

  • 35x35
    Jul, 2011
    Krystle
    I purchased a condo in Henderson, NV (suburb of Las Vegas) in July 2006. I stopped paying on it in July 2009 because I moved with my husband for his job (in the military) and we weren't able to afford the payments and living in another state. Wasn't able to sell or even rent out.(I purchased condo before marriage.) It was foreclosed on in May 2010, and foreclosure is reflected on all three of my credit reports for my first mortgage for Jun 2010 and account is closed. The second mortgage was sold to Realtime Resolutions in Feb 2010. They were trying to collect the remaining balance of $26,783 up until Mar 2011 when they said it was legally uncollectable because all the money was used as purchase money for the property. I waited until now (July 20) to call them and ask why the account wasn't closed yet on my Experian Credit report (they only reported to Experian, and there has been no activity since Feb 2011). The person I talked to said that the account was to remain open because there is a balance due, even though they are legally not able to collect on the balance. She double checked with her supervisor and said that they are not allowed to report the account as closed. How can this be correct? I asked her what about forgiving the balance and the tax implications. She again stated that the account would forever be open because of the balance due, even if they can't collect on it. I just disputed with Experian to see if they could get it to reflect closed. What else can I do? Are they (Realtime Resolutions) correct in just leaving the account open forever without being able to collect on it? What tax implications do I have to the IRS if they won't forgive the balance? Will the account ever fall off my credit report if they don't update it monthly but it still says open? Thanks.
    0 Votes

    • 35x35
      Jul, 2011
      Bill
      You mingle two separate issues.
      1. Loan liability. Is the second loan subject to your state's anti-deficiency laws? You mentioned Nevada. Nevada's rules parallel California's on this matter. In both states, if the second was a purchase-money loan that was not refinanced, then it is a non-recourse loan (there are other factors, too, but they are not in play here). Does the second qualify for Nevada's anti-deficiency rules? If yes, then this creditor may not collect the deficiency balance legally. It may not report the account as open, because legally, it is an uncollectable account.
      2. Credit report. The key date is the date of first delinquency. This derogatory may not appear on your credit report for longer that 7 years after the date of first delinquency regardless of whether it is a recourse or no-recourse loan. Creditors must report accurate information. If the creditor cannot collect the loan legally, it must show the account as closed.

      Consult with a Nevada lawyer who has experience in real estate law to learn if you have liability for the second.

      0 Votes

    • 35x35
      Jul, 2011
      Krystle
      The second mortgage was initially with AMC Mortgage company, then they sold it to Citi Mortgage in oct 2007, then they sold it to American Home Mortgage Servicing Inc, then I stopped paying in July 2009 while they were still servicing it. Then they sold it to Realtime Resolutions which started reporting to Experian in Apr 2010. When does the 7 year clock start? Is it from Aug 2009, which is the first reported 30 days late, when I stopped paying in July 2009, or Apr 2010 when they started reporting?
      0 Votes

    • 35x35
      Jul, 2011
      Bill
      Was the second a purchase-money loan? That is one key factor in analyzing California and Nevada anti-deficiency law cases.

      The date of first delinquency is the key date, according to the rules set by the Fair Credit Reporting Act (FCRA). Under the FCRA, the date the original creditor sold or assigned the collection account, or the dates subsequent collection agents sold or assigned the collection account are irrelevant. What is your date of first delinquency?
      0 Votes

    • 35x35
      Jul, 2011
      Krystle
      Yes, the second mortgage was entirely purchase money, I did an 80/20 in order to purchase the condo. Aug 2009 is the first reported 30 days late on my credit report.
      0 Votes

  • 35x35
    Jul, 2011
    jesse
    I have a 80/20 loan so a first and second mortgage. i refinanced my second mortgage and pulled out money. i live in AZ what do i look for to determine if i have a recourse or nonrecourse loan? ive looked over my original loan documents but there isnt anything in there that explicitly states one way or the other. Also ive been reading that refinances almost always become recourse if that is true is the entire loan subject to defeciency or just the amount that was pulled out? Lastly i had a consultation today with a lawyer and they want to conduct an anti defeciency review for me which will cost 1500$. They first suggwsted a chapter 13. your thoughts? thx a million for the service you provide also.
    0 Votes

    • 35x35
      Jul, 2011
      Bill
      Arizona's anti-deficiency laws are tricky, but not a tricky as California's laws. I am not aware that refinancing an Arizona home loan removes anti-deficiency protections. (That is the case in California, however.) Your safest course of action is to follow the course you outlined: Consult with an Arizona lawyer who has real property or bankruptcy experience. Chapter 13 is an excellent choice if your present financial situation is temporary and you want to save the home. If you have a second and reside in the Ninth Circuit (which you do), a Chapter 13 may extinguish a second. On the other hand, a Chapter 7 is quick and a better choice if you want to quit the property. However, you need to qualify for a Chapter 7.

      There are no perfect solutions. You need to pick the best choice that matches your circumstances and goals.
      0 Votes

  • 35x35
    May, 2011
    Shannon
    We have 2 loans - 80/20; both are with Chase and are currently in the final stages (we hope)of a short sale. The bank has accepted the buyer's offer, leaving us with approximately $114k deficience. They have not approved (nor denied) our request to dissolve the deficiency and have only said they will not "sign off" on the written verbage in the contract to dissolve it. Is this common or should we push for a definitive answer before accepting the proceeding? Will we know prior to closing whether they agree to dissolve the deficiency or if they're coming after us? Secondly, assuming we close on the short sale knowing we owe the deficiency, how long will we have to negotiate a settlement with the lenders or will we be forced into Chapter 13 Bankruptcy? Will this negotiation have to take place prior to closing?
    0 Votes

    • 35x35
      May, 2011
      Bill
      I would be surprised if your mortgage servicer would agree to forgive or cancel the deficiency balance in the short sale contract. By all means negotiate to try to achieve a cancellation! However, it is more likely the mortgage servicer will preserve the right to pursue the deficiency. By preserving this right, that does not necessarily mean it will pursue the consumer.

      If you can negotiate how the deficiency is handled before signing the contract, then do so.
      0 Votes

    • 35x35
      Jun, 2011
      Drew
      The offer for the sale of my home will pay the first mortgage in full and cash out $12K, which is great. But the bank wants that $12K to help payoff the second mortgage, which is OK with me. However, that will only pay 10% of my $112K balance on the second. The bank negotiator told me that to get the deficiency waived, I should find money to come up with 15% or another $4,800 on top of the $12K. Or else I would likely face 20%-40% of the balance if I negotiate with third party collectors after closing. In this article, Bill says to offer 10 cents on the dollar, which is already on the table with the $12K. Should I hold firm and say no, or should I give in and find some way to come up with another $4,800? My home is in California where I applied for the second mortgage as a HELOC apart from the original mortgage, so my guess is that the bank has recourse.
      0 Votes

    • 35x35
      Jun, 2011
      Bill
      The process you (an many people are in) is opaque and not documented publicly. Different mortgage servicers use different internal policies when negotiating short sales. Some second mortgagees are ecstatic to see 10% following a short sale. Others negotiate so sharply that the former homeowners are practically penniless when the process is complete. Remember that negotiation is a process. Starting negotiations at 10 cents on the dollar does not mean that is where they will conclude.
      0 Votes

  • 35x35
    Apr, 2011
    Yolanda
    About 10 years ago I did a co-sign mortgage with my mother. She moved from the property months ago because of her job. I did a qualifying assumption of the property with the mortgage company (Wells Fargo) and was approved for it to be in my name only. Well it’s about 6 months later and I can no longer afford the mortgage. I can no longer afford it because of unexpected expense issues with the house. Huge sink holes forming all over the in the yard (within about 10 feet of the house) and electrical issues that no electrician can seem to fix. After all deductions and taxes I bring home $33,000 a year. Single. No kids. I really don't know how much the property is valued at the tax info from my county says Fair Market Value is $75,000 and Assessed Value is $30,128 and I owe $72,000 on the loan. I really don't know what my options are. But I can't stay in a house that's sinking! The only other debt I have are student loans for $10,000 and a credit cards for about $10,000. I was able to pay everything fine until trying to fix the problems electrical and sink hole issues and doing that put me behind, so I don't think I'll qualify for Chapter 7 bankruptcy or will I??? If the property goes into foreclosure, based upon my income, will Wells Fargo come after me for the deficiency balance???
    0 Votes

    • 35x35
      Apr, 2011
      Bill
      Talk to a lawyer who has experience in litigating building construction defects. (Believe it or not, this is a specialty in law.) Something is causing your soil to subside. Is there an abandoned mine under your property? A leaking water main? Was the soil compacted incorrectly when the house was constructed? A lawyer will be able to do a bit of research to learn if others in your neighborhood have similar issues. Electrical wiring is extremely simple, and I am dumbfounded that an experienced electrician could not find the problem. Talk to another electrician, a reputable one, about this issue, and ask him or her to inspect your property to learn the sources of the problems.

      I see four options for you regarding the mortgage:
      1. Continue with the status quo. In other words, keep making your monthly payments.
      2. Sell the property under a short sale or deed in lieu of foreclosure. Consult with your mortgage servicer to explore this option.
      3. Investigate an FHA short refinance.
      4. Consider a strategic default.

      Click on the links I just mentioned to find the Bills.com resources that discuss these options. If you want to keep the house, options No. 1 and No. 3 are your choices. The fourth option, strategic default, is the least desirable from liability and credit score perspectives.

      0 Votes

    • 35x35
      Apr, 2011
      Yolanda
      I will be looking into contacting my county and/or a lawyer about this. But can you tell me what those values on my tax bill means compared to what I owe $72,000? Again, tax bill say's Fair Market Value $75,000 and Assessed Value $30,128. Does this mean that mean I'll be paying more than its worth and does that has something to do with the strategic default you suggested?
      0 Votes

    • 35x35
      Apr, 2011
      Bill
      Unless you are concerned about how much you are paying in property taxes, I would ignore the "assessed value" line on your property tax statement. If you want to know the real estimated value of your property, pay for an assessor to come and inspect your property, and research the sales prices of comparable houses in your neighborhood. You can do the second part of this process by typing in the address to your property at zillow.com.
      0 Votes

  • 35x35
    Apr, 2011
    Joey
    I also filed bankruptcy & never reaffirmed my first & second with BofA. I've tried modification, a work out plan & just inquired on a HAFA shortsale. All have been denied. My loan's a FHA. Eight months before I filed Bankruptcy I requested a modification because my income was reduced & my Mortgage payment was well over 31%. They kept putting it off until I filed then told me since I filed bankruptcy I had to reapply. It's been 18 months now & I'm done. I want to walk away. My question is since my Mom co-signed on the loan but quit claimed the property to me 2yrs ago is she still liable?
    0 Votes

    • 35x35
      Apr, 2011
      Bill
      Consult with your bankruptcy lawyer. He or she is familiar with the facts in your bankruptcy filing, and can give you a precise answer to your question. Generally speaking, a successful bankruptcy filing by the primary borrower will remove his or her personal liability for a mortgage or deed of trust, and not for the co-signer. Similarly, a co-signer can file bankruptcy to remove liability for a loan, but that has no effect on the liability of the primary borrower. As I mentioned, consult with your bankruptcy lawyer to learn more than the generalizations I just offered.
      0 Votes

  • 35x35
    Mar, 2011
    JP
    I have 2 loans (1st and 2nd)on primary home in CA, both purchase money without refi or mod, so solidly non-recourse. I have significant other assets, so walkaway would be a strategic default. If I walk-away, I should incur no deficiency judgement, but am I securely protected from owing tax on the deficiency? Second, I would like to purchase a second home now, while my credit is good, then move into that second home while foreclosure proceeds on the first home. Am I still protected against deficiency judgement on the first home, even though my new (2nd) home could technically be construed as my FirstHome and the property in foreclosure could be construed as my SecondHome, and therefore not protected against deficiency?
    0 Votes

    • 35x35
      Mar, 2011
      Bill
      See the Bills.com resource Mortgage Forgiveness Debt Relief Act to learn more about the tax implications of forgiven tax debt. You mentioned California. California has a similar statute for California state taxes.

      Regarding the timing of moving out of Residence 1, consult with a California lawyer who has experience litigating Cal. Code Civ. Proc. §580b to learn when you should make the move into Residence 2. Keep in mind that there are no mortgage police who watch where people make their meals and sleep at night. Your intent defines when you change residences.
      0 Votes

  • 35x35
    Jan, 2011
    Leigh
    I filed for a Chapter 7 bankruptcy in February 2004. I never re-affirmed my mortgage after the discharge.... now this property has been vacant for almost a year, and I am 3 months behind in payments. My question is since I included this property in my 2004 bankruptcy, am I liable now?
    0 Votes

    • 35x35
      Jan, 2011
      Bill
      If your mortgage was included in your Chapter 7 bankruptcy, it was included in the discharge order, and you never reaffirmed the mortgage, then you have no personal liability for the mortgage. Consult with your bankruptcy attorney to verify the facts presented here and my analysis.
      1 Votes