Getting Sued After a Short Sale?

Getting Sued After Short Sale?

Getting sued after a short sale is highly probable.  Saw three couples this month who needed to file bankruptcy, because they were getting sued–garnished in one case–by the second mortgage after a short sale.

It was surprising that they were surprised.   At the peak of the crisis, four or five years ago, second mortgages would take what they could get at a short sale and let the rest of it go.  But they don’t often do that anymore.  (At least not without intense negotiation.  I’ve seen it once in the last year.)

And usually they make you sign that you KNOW that you still owe the money.  So, where’s the surprise?

Sadly, some real estate agents are less than candid about what to expect from the second mortgage.   Here’s a link to a guy who calls himself Virginia Short Sale Advice.    A lot of what he says here is really good.   Including why a short sale is better for your credit than a foreclosure.

But he says it’s a “myth” that “you could be sued after the close of a short sale for the deficiency.”  He explains that in “many states” you can’t get sued.  That’s true in many states, but he’s writing to people here in Virginia!  Here you can.  (Bloomberg says they can sue in 39 states.) So the “myth” is actually the truth.  And his Virginia Short Sale Advice is, well …..you can figure it out.

What’s my advice?  Well, at least if you hang tough, you can sometimes get the second mortgage to agree to forgive the debt.  But you will be under intense pressure from all the other parties to the deal, the first mortgage, the buyer, and “your” real estate agent, to cave in.  You need to tell your agent up front you will not do a short sale if the second mortgage won’t waive the deficiency.

If you can’t afford to pay that second mortgage now, you won’t be able to pay it afterwards, either.    So you will end up talking to a bankruptcy lawyer, eventually.  Talk to a lawyer now.

If you at least talk to a bankruptcy lawyer, your bargaining position on the short sale is much improved.  Negotiations are won by people who can walk away from the table.

When you get pushed by everyone who wants the short sale to go through, you can push back.  “I’ve talked to a bankruptcy lawyer–and if we can’t do a short sale on my terms–no second mortgage deficiency–I’m ready to file bankruptcy instead.”

Is there any reason to actually file bankruptcy BEFORE the shortsale, rather than wait and see what they do safterward?  Yes, a big one.

You can easily lose your eligibility to file bankruptcy Chapter 7 if you wait until after the shortsale.  Why is that?  Your eligiblity depends on the “means test” of what you can afford to pay.  If you own real estate, they figure what you can afford, based on what your mortgage payments actually are–and yours are high of course, or you wouldn’t be trying to short sale this house.  When you are a renter, you get the rental allowance, regardless of what your actual rent is.  And they figure your ability to pay based on that.

When you own the house, that second mortgage payment is one of the things you are allowed to count, to show why you need to file bankruptcy.  But once the short sale has gone through, you can’t count it anymore.  Now that second mortgage is just one of the debts you have to pay, because the “means test” budget using the rent allowance shows you have plenty of money left over.

That’s what happened to one of the three couples I saw this month.  Have to pay that left over seconed mortgage–more than fifty thousand dollars, that they could have easily gotten rid of filing bankruptcy first, and then doing the shortsale.

So, did they protect their “good credit” with the short sale?  Nope, the “settled” notation on the first mortgage helped them–but the past due, judgment, garnishment on the second sure didn’t.

If you can’t afford that second mortgage while you are living in the house, don’t expect you can afford it after you move out.  And if you can’t pay all your bills on time…it’s time to talk to a bankruptcy lawyer.