Deficiency Judgment

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What is a Deficiency Judgment?

This is one of the most common questions our firm receives from sellers who are upside down on their mortgage(s). A deficiency judgment is the difference between the amount owed on a note and the amount collected when: the property is sold at a short sale, a deed is offered in lieu of foreclosure, or they are foreclosed upon.

Unless specifically negotiated in advance, borrowers have no control when it comes to deficiency judgments. Lenders have the legal right to pursue the full amount of any deficiency according to the original promissory note signed at the time or purchase or refinance. We have found that many lawyers (and most realtors) inaccurately advise clients that they need not worry since lenders rarely pursue the deficiency, the theory being that if the debtor could not afford the mortgage, he probably is not worth pursuing with a judgment (you cant get blood out of a stone). While this was true in the past, there is no question that lenders (and debt collectors who buy these judgments for pennies on the dollar) are increasingly seeking deficiencies, especially in the case of a strategic default.

It is actually to the lender’s tax benefit to deduct the anticipated loss on the loan by issuing a 1099, resulting in taxable income to the borrower, provided that the property is not the borrower’s primary residence. Many lawyers and so-called experts are of the opinion that a lender cannot pursue a deficiencey judgment once it has decided to write off the debt and issue a 1099. This is untrue! The lender may BOTH write off the debt for financial purposes, issue a 1099 to obtain the tax deduction, and legally pursue collection activities.

Bottom line – there are many cases where deficiency judgment and tax impliciations are probable, in spite of misinformation from lawyers and realtors who do not have expertise in this arena. It is important that you be educated about the ramifications of short sales and defaults – and rely on our knowledge to assist you avoiding these harsh realities in the long run.