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Prevalence of deficiency judgments and bankruptsy after short sales?

It seems that many states do not have anti-deficiency laws that prohibit deficiency judgments against borrowers with mortgages that go through the short sale process, including in Arizona: http://www.alllaw.com/articles/nolo/foreclosure/anti-deficiency-laws.html

So how common or prevalent is it for lenders to file deficiency judgments after completion of a short sale, most notably those in Arizona, in your own personal observation?

How common does it seem for borrowers attempting a short sale to file for bankruptcy?  I would think that this would be a possibility given that lenders can request for the borrower pay/settle a certain amount that they may not be able to pay back to the lender (within or outside the context of deficiency judgements), correct?

I understand that I should consult an attorney on the handling of the short sale process itself and legal ramifications - I am just trying to get a sense of prevalence & seriousness of the various possible outcomes.
  • May 12 - Phoenix
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Answers (4)

Arizona does have anti deficiency laws that apply to your primary residence, purchase money deed of trust, or non-cash out refinance loans.  You cannot be held liable for a deficit if you short sell or the lender forecloses.. If you have a 2nd loan on your primary and it was not purchased money (80/20 purchase loans), or if you have a 2nd home, investment home, or a HELOC, then those loans could be subject to deficiency judgement..  Most of your major lenders do file for deficiency judgements if the laws allow them to.. Here in AZ, I've seen where the lenders have asked the borrowers to sign a promissory note obligating themselves to a portion of the lenders loss.  This is not illegal, since the lender is not obligated to agree to a short sale.  If you foreclose, and you meet the criteria for anti deficiency, then they cannot come after you for any portion of the loss.  Feel free to reach out to me if you have any other questions.. William J. Acres
  • May 13
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Weisenburger - Thank you for sharing your experience.  I appreciate the heads up regarding potential tax liability via 1099-C, as I may have previously glossed over that.  I will be sure to get advice on the possible exemptions such as insolvency or qualified mortgage indebtedness (if it extends to the next tax year).
  • May 13
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You should speak with an attorney about your scenario since everyone's circumstances are different.
  • May 12
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It is fairly prevalent but some negotiators can negotiate away the deficiency.  BUT there is still a 1099 issued for the deficient amount that cannot be negotiated away.  This results in a income higher tax for that year and in my own case was more than I could earn in a year.  I'm still paying that one off
  • May 12
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