Deficiency Judgments after your Short Sale in Florida?

penWhen you are behind on your mortgage there are several options that a home owner has including, but not limited to:

1. Foreclosure: Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments to the lender by forcing the sale of the asset used as the collateral for the loan.[1]

2. Bankruptcy: There are two options for bankruptcy (Chapter 7 and 13):

a. Florida Chapter 7 Bankruptcy: Under Chapter 7 bankruptcy, a debtor liquates his assets where the trustee collects all of your assets and sells any assets which are not exempt. Under this type of Bankruptcy, the vast majority of cases are able to completely eliminate all of the debts. A Chapter 7 Bankruptcy takes less than a year. Whereas, a Chapter 13 Bankruptcy can take up to five years.

b. Florida Chapter 13 Bankruptcy: Under a chapter 13 bankruptcy, a debtor reorganizes his assets. A debtor proposes a 3-5 year repayment plan to the creditors offering to pay off all or part of the debts from the debtor’s future income. You can use Chapter 13 to prevent a house foreclosure; make up missed car or mortgage payments; pay back taxes; stop interest from accruing on your tax debt (local, state of Florida, or federal); keep valuable non-exempt property. There are several situations where a Chapter 13 is preferable to a Chapter 7. A Chapter 13 bankruptcy is the only choice if you are behind on your mortgage and you want to keep your property.

3. Deed in lieu of foreclosure: You hand over the keys to the lender in lieu of actually going through the foreclosure process.

4. Short Sale: A short sale is when you sell a home for less than what is owed on the mortgage. While not as damaging to your credit report as a foreclosure, your credit score will take a hit nonetheless.

5. Home Affordable Modification Program (HAMP): Through the HAMP program, the federal government offers borrowers with loans insured by Fannie Mae or Freddie Mac the opportunity to refinance into lower interest rate loans. This program does not lower the principal.

You decided on a short sale to help to rebuild your credit. In some cases, there have been potential homeowners approved in three years after a short sale for a new home with conventional financing. A foreclosure or bankruptcy will last a lot longer (in most cases at least four years and probably longer to get another home).

In 2007, Congress passed the Mortgage Forgiveness Debt Relief Act to help people who loss of their homes. This act was passed to help former homeowners from getting a large tax bills after short Mortgage-debt selling their homes. For example, someone owes $150,000 on a home but can only sell it for $125,000. The difference, $25,000, would be considered taxable income. The Mortgage Forgiveness Debt Relief Act allowed the borrower to have this debt to be forgiven (Up to $2 million of forgiven debt qualified for the exclusion).

Although you will not get a tax bill for the write off by the bank for the short sale, your mortgage holder has five years from the date of default to foreclose on your home or bring a deficiency action. On June 7, 2013, Governor Rick Scott signed HB 87, The Florida Fair Foreclosure Act into law. The statute of limitations for deficiency judgments resulting from foreclosures on or after July 1, 2013, has been changed to one year. (The time period does not begin to run until the day after the court clerk issues a certificate of title to the buyer in the foreclosure sale. This is because your mortgage holder does not become entitled to a deficiency judgment in connection with a foreclosure until a judgment has been entered and your property has been sold for less than what was owed.) Unfortunately, this revised Statute of Limitation is poorly written and does not directly address short sales in this one year time frame.

I am not a lawyer and this information has been provided as options for sellers. I would suggest consulting an attorney to go over your options. If you are interested in buying a new home or an existing home, please contact me (Alan Lane with Keller Williams Realty at 2119 W Brandon Blvd, Brandon, Florida  33511) and I can help you find a new home in the Tampa Bay Area.  My email address is alanlane66@gmail.com or call me at 813.205.9280.  If you are just starting your search, you can search the MLS for homes on my website at this link.


[1] Timiraos, Nick; Alan Zibel (2011-11-02). “Reviews Begin for Borrowers Disputing Foreclosures”. Wall Street Journal. Retrieved 2012-01-17

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