What do I need to know about deficiency judgments?

Posted On: January 2012

ASK AN ILLINOIS REALTOR, WITH TIFFANY BREWINGTON

I’m in foreclosure. What do I need to know about deficiency judgments?

A deficiency judgment is an unsecured judgment against a debtor or borrower, which may be court issued by the lender in the event of a short sale on the debtor’s home. The purpose of the judgment is so the lender may attempt to recoup monies when the sale does not provide sufficient monies to pay off the debtor’s loan in full. For example, if you owed $300,000, and your home sold for $200,000, the lender could sue you for the $100,000 difference. This is unsecured debt that is attached to the person, not the property, after a short sale.

Not all states allow the mortgage brokers or banks to pursue a deficiency judgment in the case of a short sale or mortgage restructuring. In Illinois, each lender is different as far as the paths they take with the deficiency. Some find it a waste of time to pursue. If the debtor was unable to bring their payments currents, it is very unlikely that they will have tens of thousands of dollars to pay for a deficiency judgment lien.

Quite often, a certified short sale negotiator or attorney will be able to negotiate a no deficiency provision in your agreement with the lender, so legal counsel is advised.

Will I have to pay taxes on the deficiency judgment?

Normally, debt that is forgiven or cancelled by a lender must be included as income on your tax return and is taxable. In 1997, President George Bush signed into law the Mortgage Forgiveness Debt Relief Act, which ensures that any deficiency written off as part of a short sale WILL NOT be taxed as income, as long as it is the Primary Residence. The Mortgage Forgiveness Debt Relief Act applies to debt that is forgiven only in years 2007 through 2012. The advice of a certified public accountant is needed.

Tiffany Brewington is an Illinois Licensed Realtor and Short Sale Expert with Chicagoland Residential Realty in Downer's Grove, IL

Have a Foreclosure or Short Sale question? Please write to Tiffany Brewington

Posted On: January 2012

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