Short Sales, Foreclosures and Bankruptcy

Here's the situation: John and Mary short-sold their home a year ago.  Or maybe they couldn't quite pull that off, so it was foreclosed on.  They were sad and disappointed, but moved on.  They thought...

Fast forward: the holder of the second mortgage, in the amount of, say, $125,000, is now suing them for the entire balance owed.  Say what?  Oh, yeah.  This is one of the dirty little secrets that pretty much no one but bankruptcy lawyers is talking about.  And it's becoming a real "OMG" moment for a lot of borrowers, but it's one we've been warning clients about for years.

Worth reading is an article in April 12, 2010 Wall Street Journal, page A2, which tells of a specific case of a San Diego borrower who short sold her house .  While politicians are pressuring banks to change this practice, so far this remains a really serious risk for a homeowner who must give up their home  due to short -sale or foreclosure .  Most of the time, first-mortgage lenders are not a threat, though they can be.  It's those second mortgages that are far more dangerous for you the owner to get sued.

Bankruptcy is the only way to eliminate the threat from ALL lenders.  Some lenders will voluntarily agree not to pursue the borrowers.  Even when they do that, the borrower still risks a ginormous tax bill for "debt forgiveness."

THE BOTTOM LINE : Get legal advice before you do a short sale or get foreclosed on . Do it to make sure it is really going ot be over.