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Debt Relief – Insolvency – Bankruptcy Information » Foreclosure Help, Foreclosure Law, Insolvency » The Four Options the Bank has When There is a Foreclosure Deficiency

The Four Options the Bank has When There is a Foreclosure Deficiency

One of the most common questions that a homeowner looking for help with their pending foreclosure asks is – what will the bank do to me if there is a defiency owed?

Before I answer that question let me first discuss what I mean by deficiency. When your property is distressed and is facing foreclosure there is often a deficiency owed your lender/bank after a short sale, foreclosure auction, deed-in-lieu-of-foreclosure, etc. In other words the bank only receives back an amount less (i.e. deficient) than what they lent you. That difference of what they were paid back and what you borrowed from them is the “deficiency”.

The bank has a number of options to deal with the deficiency you owe them. I want to point out here that the method you use to resolve the foreclosure situation may impact the decision they make about how to handle the deficiency.

Case in point, in my real estate experience, I have never seen a bank file a judgment against the homeowner when a short sale was successfully completed. On the other hand, I have heard on multiple occasions that when a homeowner let their home go to the foreclosure auction that the bank went after them by filing a judgment. I will talk about the judgment scenario in a moment.
I just want you to keep in mind that your decisions on how you handle the home in default may impact how the bank responds later down the road.

The bank has basically 4 different options when faced with a homeowner deficiency:

1. Do Nothing – The bank can often just writes the loss off and walks away. I see this happen quite a bit with short sales.

2. 1099 the Homeowner – The bank sends IRS form 1099-C (the “C” stands for cancellation of debt) to the homeowner for the deficiency amount. This essentially means they are passing on the deficiency as taxable income. This is probably the more common thing that happens. This shouldn’t be a problem if the home is your primary residence.

3. Reaffirmation of the Debt – On rare occasions, especially in a short sale situation, the bank simply requests that you sign a new promissory note for the deficiency amount to “reaffirm” the debt owed to them. This simplifies their efforts to send the deficiency to their collections department and recover as much as they can of that deficiency.

4. Deficiency Judgment – Sometimes the bank gets more aggressive and decides to spend the money on attorneys to file a judgment (i.e., law suit) against the homeowner for the deficiency amount. I have seen this happen mostly with local banks and credit unions that can’t afford to take the loss.

These are the four options that banks have when faced with a deficiency. Again, if you decide to use a remedy like a short sale you are less likely to have a deficiency judgment filed by the bank.

Article by D. Rogers

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