HAFAmaster.com – Call 310-562-0310 for FREE Consultation

Perhaps the biggest question most homeowners have when they are about to lose their home is whether their lender(s) will go after the deficiency amount, or the difference between the final payoff to their lender(s) from short sale or foreclosure and the actual loan balance. In many cases, the amount can be in the hundreds of thousands of dollars.

In California, new state law civil code section 580e now prohibits ALL lenders, 1st, 2nd, and any junior lien holders from collecting deficiency and filing deficiency judgment after completion of a short sale. Please note this law only applies to short sale, and not always true for foreclosure. In California, 99% of lenders file non-judicial foreclosure, which is the Trustee Sale, as the mean to fully settle the debt as opposed to filing any deficiency judgment. However, many homeowners have a misunderstanding that if they do anything and let their home go to foreclosure, they can just walk way free of debt. According our legal consult, this is NOT TRUE!

Foreclosure as satisfaction of debt normally only applies to the 1st lender. When there is a 2nd loan (or any junior lien) that is not purchase money (loan in any position used to purchase the home), the foreclosure action taken from the 1st lender will not relieve the homeowner from any debt responsibility of the 2nd loan (or any junior lien). This means even after foreclosure, the 2nd lender (and other junior liens) can continue on with their collection activities for the full balance. Yes, FULL BALANCE!. In many cases, homeowner lost their home through foreclosure, had their credit ruined, and in the end they are stuck with a huge balance of unsecured loan from their 2nd loan.

Be careful you understand what foreclosure will and will not do for you. If you have a second loan (or any other junior liens) that you obtained after you bought your home, Home Equity Line of Credit (HELOC), or even refinance on your 1st position mortgage, consider doing a short sale instead of doing nothing and let the home go to foreclosure. If you are not sure what to do, at least consult some distressed property experts, lawyers and tax accountant for some advise. Short sales do not require any upfront cost. It is a much more responsible way to hand-off the home to the next owner while working with your lender(s) to complete the process. The California laws and IRS tax laws will make sure you can cleared from any deficiency and tax liabilities.

To see more information on short sale anti-deficiency laws, it is best to read the article and summary written directly by Stella H. Ling, Esq., the Senior Counsel of the CALIFORNIA ASSOCIATION OF REALTORS® (CAR) :
CAR Magazine Article: The Short of It on Deficiencies, Jan/Feb 2012.
Short Sale Deficiencies Fact Sheet

Get your FREE Consultation on Short Sale and Loan Modification and FREE Short Sale Service by calling 310-562-0310 or click here

The above information was gathered by our research and work experience as real estate agents working on distressed properties. Please note we are not attorneys or accountants and we do not provide legal or tax advises. Please consult your own attorney and accountant for legal and tax advises.