In all situation our negotiators strive to obtain a "Full Release and Satisfaction" of your debt.  Obtaining a full release and satisfaction from your lender is best for you, the obligor, but in some instances the lenders will not allow it.  In fact, sometimes they present us with two separate amounts, one for a lien release only and another for a full release and satisfaction.

Where does the money go?

Remember, lenders accept short payoffs because they make more money than taking the houses back and selling them later. But in either situation (foreclosure vs. short sale), the lender typically loses large sums of money.  With their loss:

1. If Full Release and Satisfaction - They can write the loss off on their taxes as a business loss, but they must report it to the IRS and send you a 1099-C for the amount.  IRS says that because you technically received the benefit of the money, and you did not have to pay it back, then it is treated as ordinary income that you need to pay tax on.  However, the Federal Mortgage Debt Relief Act of 2007 has put a moratorium on IRS collecting tax on all foreclosure-related 1099's for primary residences through 2010.  Additionally, the IRS Form 982 which may also release you from paying the tax if you can show you were insolvent.  In all cases you need to consult with your financial advisor or accountant about the tax consequences of foreclosure.  We are neither.

2. If Lien Release Only -  The lender (or someone they sell the note to) can choose to sue you to collect the difference from you.  The lender has the right in most states to pursue you for the difference between the amount they recover (regardless whether short sale or foreclosure) vs. how much they were owed.    This amount is often called the "deficiency" or the "shortfall".  They can do this because even though they released the lien, you signed a "promise to pay" when you received the loan.  Not all lenders do this as some are more aggressive than others. Contact our office today to learn our recent experiences with your particular lender(s).    

   They may:

   •  Ask you to sign a new "soft" promissory note for all or part of the deficiency as a condition for them agreeing to the short payoff.  These notes are usually 0% interest and payable over  3  - 15 years.   

   • Ask for a small contribution towards their loss at closing.  This depends on the size of the loss and your financial situation.  The more they see you have, the more they'll ask for.  Typically this amount is about $2000 - $8000 and is in lieu of a promissory note.

   • Sell this debt (the deficiency amount) to a collection agency or attorney who can pursue collection efforts, obtain a court judgment against you and garnish your wages or assets. This is generally quite unpleasant but fortunately it is uncommon.

   • Do nothing.  After absorbing a big loss, sometimes lenders do not want to spend another minute dealing with it.  Thus it is possible you may just receive a 1099.

One of the main reasons we advocate short sales is because the lender(s) receive more money through a short sale than by taking your house back and reselling it. This in turn generally creates a smaller shortfall that you could potentially be liable for. 

We assess your situation for FREE and help you analyze the issues and options we see given your unique situation.

You have important choices to make and educating yourself is the best way to make an informed and confident decision.

Call us anytime - 303-399-7484