Las Vegas, home of the short sale, the loan default and the overblown real estate bubble, is now also home to a bevy of “surprise” wage garnishments that are changing the way people think of the government, their banks, lenders at large and – surprise – real estate investors.
Real estate investors have not been covered in a flattering light for some time, but generally people who actually manage to sell their homes with the help of a short sale negotiator or other real estate investor tend to end up being grateful to be out of a bad situation. However, in Nevada, which led the pack when it came to the real estate boom and then the subsequent bust, homeowners who negotiated short sales may now find themselves on the hook for the difference – and that hook could include wage garnishments and liens on other assets accumulated or saved by the original short sale. And they’re blaming everyone – including their realtors, their agents, the government, the lenders and real estate investors in general – for the oversight.
Are these delayed collections legal? Yep, sure are. Nevada is a “recourse state,” which means that lenders and collection agencies can continue to pursue deficiency judgments long after a homeowner may believe that the issue has been resolved. In fact, the collection agencies and their litigation teams have been working to give the appearance that all is well with short sales, actually “putting a clock of one or two years on the debt so the person can a new job and back on their feet” (thereby providing something for the collection agency to garnish), reported a bankruptcy attorney to the Las Vegas Review-Journal on March 14, 2010.
Does this mean that there is no reason to do a short sale in Nevada and other recourse states? Absolutely not. But it does mean that you must read the fine print and make sure that your homeowner is protected, and if they are not, make sure that you negotiate that protection as part of the deal or find a lawyer who can write that into the contract in an effective, binding manner. Because you can be sure that when the collection agencies call them that whether it’s fair or not, you are ultimately going to end up with part of the blame and could face legal issues – not to mention you’re going to feel terrible – as a result.
Your thoughts are welcomed in the comments area below.
Thank you for reading http://realestate.BryanEllis.com!
What other states are recourse states?
Thanks for the info on short sale pitfalls Bryan!!!!!!!!
Thanks for the info…. In Indiana, one of my clients was told by her tax person that she would have to pay the IRS Federal taxes on the unpaid amount of the balance owed on her mortgage when her home was sold in a S/Sale.
Does anyone have any knowledge as to the accuracy of this info ??
Yes, the lawsuits ARE coming; especially for short sale investors in CA who don’t know and often didn’t follow the rules.
1695, for example, prescribes civil and CRIMINAL remedies to breach.
For this and a number of other reasons, I am confidant my organization is one of the few who truly understand and appreciate all the ramifications of sellers in distress in CA short sale transactions.
I feel sorry for the many wannabe short sale investors that want to play in CA and have been misled by the many short sale “gurus” (often NOT in CA) that make it sound easy and riskless. It’s not.
Great for me though; less competition going forward as more and more of my competitors get sued or even indicted.
Comments above:
1. Other recourse states – first off, many states are a hybrid: they can go judicial or non-judicial with a tendency to almost always go non-judicial since it’s quicker and less costly. States that allow non-judicial foreclosure, and/or where non-judicial foreclosure is more common and deficiency judgments can be obtained more easily:
Michigan
Minnesota
North Carolina
Rhode Island
South Dakota
Utah
Wyoming
However, for short sales, effectively ALL debt is recourse. The recourse/non-recourse discussion is only relevant to trustee sale/foreclosures, NOT short sales.
2. Many homeowners are protected form IRS income tax on forgiven debt by the Mtg Debt Forgiveness Act of 2007 (extended to end of 2012):
Qualified principal residence (lived in at least last 2 of 5 years)
1-4 units
Up to $1M ($2M if married filed jointly)
Only cancelled debt used to buy, build or improve your principal residence or refinance debt incurred for those purposes qualifies for this exclusion.
To “Dcass” — If principal residence, homeowner selling short legally is exempt from paying income tax on “forgiven” debt.
Investors and 2nd home owners are NOT exempt.
In Florida (a RECOURSE state), I expect BK filings to surge as junk debt buyers go after short sellers who mistakenly thought their nightmare was behind them.
Florida allows a creditor up to 5 years to pursue judgment and up to 20 years to COLLECT. You may or may not know that in some ways a judgment is worse than BK.
To me, the most important word in Bryan’s article is “BINDING.” Before signing off on the approved short sale, confirm full payoff and satisfaction is BINDING!
Banks are not content with billions in taxpayer bailout $$ — they want this deficiency cash from distressed sellers recovering financially in 1-5 years.
Mike
what options or protection does a california short seller who is being pursued by a collection agency for 2nd mortgage balance? my realtor told me that the s/sale will eliminate both mortgages but its not. both loans are original purchase money of a principal residence. so why is this collector keep pursuing us? my sons are co-borrowers in both loans. how can i fend them off? is my situation hopeless n that i have to pay this collector? thanks