Every week I counsel homeowners facing foreclosure, and inevitably the same question comes up at some point in the conversation: “What happens to the money I owe the bank if they foreclose; I won’t have to pay it back, right?” Unfortunately, the answer is that the bank may indeed attempt to make you pay it back.
If a bank either forecloses or approves a short sale, there are basically two approaches they can take concerning the difference between what was owed on the mortgage and what they collect. The first approach is that they can write off the deficiency and issue the former homeowner a 1099C for the deficiency amount. At that point the former homeowner is essentially dealing with that amount as an income matter, which must be reported to the IRS and needs to consult a CPA to avoid or minimize such a tax liability.
The second approach is that the bank may opt to sue the former owner for the difference between what was owed on the mortgage and what they collected. Such a judgment may be used to attach other assets or garnish wages of the former homeowner and may necessitate filing bankruptcy in order to discharge and settle the matter.
These are not ideal choices for homeowners already struggling with mortgage payments or who need to sell their home but find they cannot sell it for what they owe due to falling home prices. Whether a bank opts to pursue a deficiency depends on many factors and often has little consistency from transaction to transaction or bank to bank. Even more frustrating, banks often refuse to tip their hand and indicate their intentions until long after a foreclosure or short sale has occurred.
What is important to understand, however, is that consulting with an attorney and constructing a game plan helps to minimize liability and clarify your risks. For example, if a property is listed for sale prior to an auction date and a short sale is approved – meaning that the bank agrees to accept less than they are owed – an attorney may be able to negotiate away the deficiency and convince the bank to issue a 1099C to the homeowner. Additionally, any deficiency occurring from a short sale is likely to be much lower than a deficiency resulting from foreclosure because short sales generally yield the bank more money, so essentially the homeowner ends up trying to manage a smaller debt.
Our office has a great deal of experience in these matters and is available to help you or your clients determine the most effective strategy for managing these situations. Please do not hesitate to contact us and as always remember, avoiding mistakes is always less costly than correcting them.
-Andrew Martignetti, Esq.
Information in the above article is for educational purposes only and does not create an attorney-client relationship. You should not construe this to be a legal opinion on any specific facts or circumstances, and you should not act upon this information without seeking professional counsel.
