Giving your Bank the “1-2” Punch: Mortgage Debt Cancellation and Debt Settlement
Homeowners short selling their home should never believe that a short sale automatically relieves them of their obligation to pay the deficient balance. What I mean by the “deficient balance” is the difference between what you owe and what your property sells for.
Naturally, “mortgage debt cancellation” became a hot topic when short sale companies (including foreclosure prevention companies) all throughout the nation realized how well this “idea” attracted customers. Many short sale negotiatiors will tell clients not to worry about the deficiency because the lenders “rarely ever pursue them.”
Well I’m here to tell you that though this may be true, sometimes the lender/PMI/3rd party collections agency will pursue the borrower for unpaid mortgage debt after the short sale.
You might be asking yourself, “so what on earth am I short selling for? Might as well let my property go into foreclosure since my state is an Anti-Deficiency State.”
Though it is true that some states do not allow lenders to pursue a deficiency judgement (ie. in a non judicial foreclosure), you must consider the non foreclosing lenders position. Here in WA. State, a non foreclosing, junior lienholder (ie. your 2nd mortgage) can sue you for “breach of contract,” even in a non judicial forclosure.
Now if foreclosure isn’t an option, homeowners may consider filing for BK. Filing for BK may be a good idea for some, but for others, a couple key factors must be considered:
1. Repayment plan might be too high
2. Opportunity cost of having no credit
3. Short Sale might be “cheaper” in the long run
Now what do I mean by a short sale being “cheaper”?
Many homeowners, after hours of grueling research, consulting with attorneys, etc. will come to find out that a short sale is still the best option among the three that I have mentioned for a couple of reasons:
First, the risk of being sued at foreclosure is too high, since the deficient amount is maxed out and in the event of being sued, the homeowner will be at great risk, including liens against his/her assets, wage garnishment, etc.
Second, filing for BK eliminates the option to borrow money and/or the repayment plan is more costlier than a repayment plan that would be incurred in a short sale.
One must conclude then that the point of a short sale is to:
1. Generate the highest offer (to pay off the lienholders as much as possible and reduce the deficient balance). This eliminates the validity of all of the “foreclosure prevention” companies out there seeking to flip your property for profit. I will elaborate on this on another post.
2. Negotiate a reduction or elimination of the remaining unpaid mortgage debt
3. Arrange the lowest repayment plan possible in the event that the mortgage debt cannot be cancelled.
So finally, how do the real short sale experts deal with unpaid mortgage debt on behalf of the borrower? We give banks the 1-2 Punch combination.
Imagine you have a loss mitigator and one of our negotiatiors in a boxing ring. The announcer yells, “let’s get ready to rumble!” and the fight begins. The 1-2 Punch combination is how our negotiators end up knocking out the loss mitigators almost everytime. It usually goes like this:
*Feeling each other out: We negotiate a short sale and aim for a full pay off or cancellation of debt. Sometimes they will, sometimes they won’t.
*First punch: In the event that they won’t, we sell the property and remove the security / collateral on the note, rendering the note unsecured. When you sell your property in a short sale, you essentially pull the rug from underneath the lender, because now the note is not secured by your property, or by anything from language on a contract. So unless the lender sues you (which is expensive) they can’t really do much to collect on the unpaid mortgage balance. We usually knock them out at this point and the homeowner ends up with a 1099 for the difference, of which there are exemptions available.
*Second punch: Should the lenders, the PMI or a collections agency try and pursue you for the unpaid mortgage debt, we swing them a final, knockout blow by negotiating yet another reduction to the balance with our debt settlement negotiators. No institution likes to have non-performing, unsecured debt in their books and almost always will accept a reduction and have a cooperative borrower then to simply leave the debt “hanging.”
This concludes our discussion regarding mortgage debt settlement, debt cancellation and our 1-2 Punch combination for reducing and ultimately eliminating your short sale deficiencies and unpaid mortgage debt. May this information guide you into the right direction.