Would You Pay 2 Cents per dollar? Watch Out for the Paper Tigers of Deficiency
So you did the noble thing, you avoided foreclosure, helped your lender and their investor avoid a catastrophic loss when you could no longer pay your mortgage, and salvaged a little better credit rating by short selling your house. Do not expect gratitude from your lender for helping them make lemonade out of a total lemon market that has dropped home values about 50% since 2007. The latest reports on our region show that home prices are now at the 2002 level . . . a decade of appreciation erased by this ongoing recession.
You could have walked away and left your lender with the problem, left them to insure the property, pay the taxes, eat the decade of lost value, pay to maintain and sell, and incur other costs. But you didn’t.
Many sellers who sold their homes for less than they owed their mortgage company received written agreements that the remaining debt was forgiven. Other mortgage companies refused to put that status in writing. Many mortgage companies send their former borrowers a scary 1099 after the final closing on the property that makes it seem like they had significant “phantom income” in the form of forgiven debt. Consult your tax advisor on the actual impact of these 1099’s.
But the latest and most unsettling trend by several of the lenders in short sales is to sell their remaining unpaid debt to debt collection companies after all the dust of closing has settled. We have even seen several of the top 5 U.S. mortgage lenders selling debt that was “satisfied” or “forgiven” in the short sale! These “blocks” or “lots” of debt are often passed from collection company to collection company until the final company pays less than 2cents on the dollar to buy the debt. It is literally worthless debt in many cases, but the collectors count on the sad fact that many borrowers are so beaten down that they just throw money at debts in disorganized and unplanned ways to make the calls stop. In many cases of phone calls to collect shortsale deficiencies, it is best to treat the solicitor like drugs: “JUST SAY NO”. If the debt was forgiven, let them know that you know that it was forgiven. They are very unlikely to invest money in legal fees or court costs to sue you for this sort of a defensible debt. The harassing calls are the worst that can be done to you! The collector is a true Paper Tiger.
Other things you can do to protect yourself : (1) Google the Fair Debt Collection Practices Act and watch for violations of the FDCPA when you are called. There is a limit to times and places that you can be called! Violations can be very expensive for the collection agency and may take all the profit out of their 2 cents on the dollar investment in your deficiency! Know your rights! (2) Invest in a financial planning or debt management course like Financial Peace University with Dave Ramsey (www.DaveRamsey.com) or check out the cash management resources available online at (http://crown.org/) from Larry Burkett; (3) If you hate confrontation and need an extra layer or protection between you and the collection companies, call our firm to make an appointment to discuss your situation. We will review the status of your deficiency forgiveness with you, evaluate other debts that may be causing stress in your life, and consider all options with you, including the nuclear option of filing bankruptcy for a fresh start. Call today (757)467-7600 and ask for Hunter or Charlie.