Modifications,Short Sales,Deeds in Lieu,WriteDowns

Insights on Deficiencies from a Florida Attorney

Posted on Wednesday, January 27, 2010

What if the bank won’t release you from the deficiency? This lawyer says on commercial properties do the short sale anyway and deal with the deficiency later if you have to. But if the property is your residence he says don’t agree to a short sale without some kinds of agreement about the deficiency. Why? Because you can continue living in the house for free, an additional benefit, until the bank takes it back by foreclosure.

About the deficiency, banks use the term "charge off." This does not mean they are releasing you from the deficiency. Be careful Once you’ve sold the house, the deficiency will be an unsecured debt. If you are married, depending on who was on the loan and how you hold your other assets, it may be uncollectible.

And as for the taxes on the deficiency, if the property is your primary residence, under the Mortgage Debt Forgiveness Act, there is no tax. UNLESS you did a cash out refinance, in which case the amount cashed out will be taxed as forgiven debt.

Interestingly, he said that most of the time the bank is right about whether to accept an offer or not – they seem to be able to gauge market value pretty well. Don't hold out for higher price - up to bank to accept/decide value. Most of time their right.

If getting released from the deficiency is important to you, make sure the purchase contract gives you an out if bank won't release you from the deficiency.

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