How To Avoid Deficiency Judgments

Whether or not the bank can collect a Deficiency Judgment from you depends on what your promissory note says and which state you’re in.  More About Deficiency Judgments.  Because your default and any resulting Foreclosure Lawsuit comes from a breach of your promissory note (not the mortgage), you’ll need to read your note carefully to see if it provides for personal liability against you.  Difference Between Your Promissory Note and Mortgage.

However, in some states like California Deficiency Judgments are prohibited on most residential loans (although refinancing can be an exception). California and others like it are called Non-Recourse states because they prevent personal liability on your home loans.  Many other states unfortunately including Florida, New York and Texas permit Deficiency Judgments against homeowners although your loan documents may still protect you.

The best way to avoid a Deficiency Judgment is selecting a Foreclosure Option that lets you control the outcome. By using a Short Sale or Deed in Lieu of Foreclosure thereby working with rather than against the bank, you’ll be in a much stronger position to demand waiver of the deficiency balance as a condition to working with them. Banks would much rather waive the right to collect a Deficiency Judgment than pursuing a costly Foreclosure Lawsuit with little or nothing to gain.

Learn About All Your Foreclosure Options

 Sample Foreclosure Documents and Letters

On the other hand if you just Walk Away or force the bank to pursue a foreclosure lawsuit to the bloody end, the normally unfriendly banks will be colder than ice and happily chase you down for the deficiency balance and anything else they can get their claws on. Read Why Walk Away is Your Worst Foreclosure Option.

A final note about possible tax consequences.  It’s important to understand that any amount the bank agrees to waive may be treated as income by the IRS. The idea is that you’re supposedly “saving” money by not paying off your mortgage in full which may qualify as income.  So even when the bank agrees to waive your deficiency balance and not pursue a Deficiency Judgment against you, they may still be required to issue a “1099” declaring your income. Can’t win for losing!  The good news is that at least through the end of 2012, the income will not be taxable for short sales although its unclear if the exemption will be extended.

Even if you can’t get a a resolution to your foreclosure lawsuit before the tax exemption expires in 2012, it’s not all bad news because its one or the other — the bank can’t pursue both collection of a deficiency judgment and calling the loss  income to you so there is some control over which method is best for you.  For example, since many homeowners involved in foreclosure lawsuits otherwise have little or no income, a 1099 for the difference between your mortgage and the amount paid in a short sale would have little actual financial impact and in that example would prefer to waive the Deficiency Judgment.

Consequently when you’re negotiating final terms of a short sale or deed in lieu of foreclosure with the bank, tell them your preference and insist  it be included in the final agreement. Make sure to GET IT IN WRITING if its not already part of the final written agreement because verbal promises won’t work.

Related Content:

What to do With Your Second Mortgage

Importance of the Default Notice

Don’t Let Foreclosure Stress Control Your Life

Who Owns Your Mortgage

Image provided by Wikimedia Commons



Tips For Short Short Sale Approval



There are many things you can do to improve the chances of  short sale approval. In fact, by doing a little basic research about your home’s current value and learning all you can about the Foreclosure Process you’ll make a proposal that will be hard to refuse.

Full Coverage of Foreclosure Short Sales

The biggest hurdle in getting short sale approval is convincing the lender that its the best outcome for both sides. By confirming that your mortgage is underwater and that you can’t afford the monthly payments, the lender will quickly realize that there are few options and a short sale is much cheaper and easier for them than a protracted Foreclosure Lawsuit.  Further, as the inventory of bank owned properties continues to grow they are less interested in adding your home to that inventory and much more inclined to work with you.

To confirm to the bank that your mortgage is underwater, you’ll need to document how much your home is worth based on comparable sales in the area. You can get this information from a local realtor you trust, an appraisal company or one of the many online websites that provide price estimates like and other sites. How Do You Know if You Have an Underwater Mortgage?

Once you can show the lender that your mortgage is underwater and by how much, the next step is submitting a package with all of your supporting materials.  To help you contact the bank to both explain your financial condition and request your specific Foreclosure Option, we’ve prepared several different Sample Documents including cover letters and financial hardship letters for each foreclosure option.

 Sample Foreclosure Documents

As for supporting information, banks typically require a hardship letter that explains the nature and cause of your financial problems together with tax returns and recent pay stubs to make sure they’re not getting ripped off by people who don’t really have financial problems. By using our Sample Documents to guide you, the bank will recognize they’re dealing with an educated borrower and be much less inclined to take advantage of you.

Related Content:

Deed in Lieu of Foreclosure Hardship Letter

Short Sale Cover Letter

Loan Modification Hardship Letter

Photo by Ambro

Ten Ways to Stop Foreclosure and Protect Your Foreclosure Rights

The fear of losing your home is a big deal and an emotion shared by millions of other homeowners so you’re not alone. However don’t let fear control what may be the most important financial decision of your life so try to relax and take the time to learn everything you can about the Foreclosure Process and understanding that you have Ten Different Ways to avoid foreclosure sales.  Once you know that there’s hope for a good outcome you take the fear and emotion out of the picture and make decisions that are best for you and your family.

Learn How to Use to Stop Foreclosures.

This post will briefly discuss ten ways to stop foreclosure and methods to stop foreclosure sales. You can also find more in-depth coverage and Sample Foreclosure Documents for each of the Foreclosure Options discussed here by visiting our Foreclosure Options section.

The most frequently discussed foreclosure option is a Short Sale which involves selling your home for less than the amount of your loan after getting bank approval for the sale.  If you try for a short sale to avoid foreclosure it’s also important to know how to avoid Deficiency Judgments and what to include with your request for short sale approval.

Short Sale Cover Letter

Short Sale Financial Hardship Letter

The second foreclosure option is a Loan Modification from the original lender or re-financing from a new lender to lower your overall monthly payments. This option is the primary feature of the recent Nationwide Foreclosure Settlement discussed in a related blog and will be the focus of more advertising and financing options in the next several months because of the agreement.  Results can vary greatly with different lenders so be sure to put together the right information needed to convince the bank that your request is real and that a loan modification is essential to help you avoid foreclosure rather than an easy way to save money you already have.

Loan Modification Cover Letter

Loan Modification Financial Hardship Letter

The third most popular alternative is a Deed in Lieu of Foreclosure which is the quickest and easiest way to stop foreclosure sales and avoid foreclosure lawsuits.  The process simply involves transferring your property to the bank with a document similar to a quitclaim deed but it may not release you from a possible deficiency judgment or income tax consequences so be sure you understand the possible consequences before moving ahead.

Deed in Lieu of Foreclosure Cover Letter

Deed in Lieu of Foreclosure Financial Hardship Letter

A fourth way to stop foreclosure is closely related to the Deed in Lieu of Foreclosure and is called Deed-For-Lease and is becoming more common with Fannie Mae and other lenders.  What this involves is executing a Deed in Lieu of Foreclosure together with a Deed-For-Lease which lets you rent your home from the bank and stay in your current property.  This is a new and exciting foreclosure option that we’ll cover in more detail in future posts but you can get more information now by visiting which is a site sponsored by Fannie Mae.

The fifth way to stop foreclosure is renting out your home for 2-3 years while temporarily moving to a cheaper location to reduce your expenses and get back on your feet financially.  You can also rent out rooms or any portion of your home but either way the obvious advantage is the ability to save your home and avoid foreclosure completely. Read More on Foreclosure Rentals to Stop Foreclosure.

The sixth foreclosure option is Defending Your Own Foreclosure Lawsuit or hiring a lawyer to help you.  As a result of the numerous  mistakes and fraudulent documents used by banks and loan servicers to support their lawsuits, there are a number of very strong defenses available to help fight foreclosure cases.  Although we recommend hiring a lawyer to handle your case or at least consulting with one for an hour or two to help understand local laws and procedures, you can defend your own foreclosure lawsuit.

Foreclosure Defenses

Sample Foreclosure Answer

Foreclosure Lawsuits

The seventh foreclosure option is filing for bankruptcy protection which results in an automatic stay of all foreclosure actions.  Although its the single most effective way to stop foreclosures and avoid foreclosure sales at the last minute, the stay is temporary and is not a long term solution.  If you feel that bankruptcy may be the best option for you, meet with an experienced bankruptcy attorney in your area and make sure that your first meeting or consultation is free.  Read More About Foreclosure Bankruptcy

The eighth foreclosure option is called “Forbearance”  in which lenders agree to temporarily suspend or reduce monthly payments for a specific period of time if you’re in a situation where the short time off will help resolve your financial crisis.  There are many programs available for veterans and other homeowners with additional information at Fannie Mae’s and directly from participating lenders.  Forbearance to Stop Foreclosure

Strategic Default is the ninth foreclosure alternative and actually a combination of one or more of the earlier foreclosure options we’ve covered.   Essentially, Strategic Default is the decision to stop making mortgage payments that you can otherwise afford to pay with the goal of reducing the principal balance of the loan, the interest rate or both to more accurately reflect the value of your home in today’s depressed housing market.  With home values down 50% or more in many places it can be a very effective way to improve a dramatically under performing asset and is nothing more than a business decision with no moral implications or obligations whatsoever.  Blame the Banks for the Foreclosure Crisis.

Strategic Default to Stop Foreclosure

Sample Foreclosure Letters

The last option to avoid foreclosure is to Walk Away which for reasons covered in our foreclosure options section has the highest risk of a negative outcome with the least to gain as a result of doing it.  It’s listed last for a reason and don’t even think about doing it until you understand more about the foreclosure process and how much time and how many different options you have.

Related Content:

Read more about the Foreclosure Process 

Nationwide Foreclosure Settlement

Dangers of Foreclosure Stress

Photo by Simon Howden




If you are not an attorney, you are advised to seek the advice of an attorney for all serious legal matters.  The information and forms contained herein may not be applicable to your particular situation or conform to the requirements in your state and thus should not be relied upon or construed as providing legal advice or counseling.  If you have a specific legal problem seek the advice of an attorney in your city or state whenever possible about your situation.

©SavetheCave.Com. The design of the website as well as all text, documents, materials and information are copyright protected and subject to all applicable intellectual property rights.

Disclaimer Download