A one pager, wallet size, Short Sale Foreclosure Wallet Size Answer Sheet if you will, to hand to clients on the basics of short sales.  The full text is as follows:

Short Sale / Foreclosure

Wallet Size Answer Sheet

Prudential, Americana Group, REALTORS®


What is it?

A Short Sale is when the home sold for less than the debt against property and the lender agrees to accept a discounted payoff.

A Foreclosure is when the lender seizes the home that the loan is secured by through the foreclosure process, which is notice of acceleration of note, notice of default, notice of sale, and then actual forced sale of the home known as a ‘trustee sale.’

What are the tax consequences?

Short Sale & Foreclosure….all debt forgiven results in 1099C debt. Whether it is a principal (where you live) or rental property makes a difference as to how much tax you may pay. Simply stated, if debt you owed is canceled the IRS sees that as income to you, as if you received a pay check. You can exclude canceled debt from income if it is your principal residence debt, which is debt incurred in acquiring or improving your qualified principal residence up to $2 million ($1 million if married filing separate). See this publication from the IRS http://www.irs.gov/irs/article/0,,id=179073,00.html on “Mortgage Workouts, Now Tax-Free for Many Homeowners; Claim Relief on Newly-Revised IRS Form” and http://www.irs.gov/pub/irs-pdf/p4681.pdf on “Canceled Debts Foreclosures Repossessions and Abandonments.”

What are the Credit Issues?

Foreclosures and Short Sales will appear on your credit history and affect you for up to 10 years. This may affect a.) employment or b.) security clearance, etc. Rumor is that a short sale is better than foreclosure for these items? There is no evidence to back this up. Arguments on both sides are out there. We do know that there is a specific spot on the credit reports for foreclosure, whereas short sales are reported differently.

What is the liability for the Debt AFTER the foreclosure or short sale?
6 Months

Foreclosure – The foreclosing lender has the right to sue the home owner after the foreclosure for the difference between the amount gained at the ‘trustee sale’ discussed above and the balance of debt owed. The lender has only 180 days (six months) from trustee sale to file, after that the owner is no longer liable.

6 Years

Foreclosure 2nd Deeds – All deeds that are junior to the foreclosing lender have different rights than the foreclosing bank. These lenders are called ‘sold off junior lien holders’ and they have six (6) years to recoup their debt. That means you get foreclosed on November 12, 2009, these junior lien holders have until November 12, 2015 to sue you. In other words, you will have just finished buying your plane tickets for the 2016 Olympics to Rio de Janeiro and you can still be sued. It’s a long time.

Short Sale – All lenders that agree to a discounted payoff and ‘release the lien’ from the property to allow the short sale are no longer ‘secured lenders’ and are now ‘sold off junior lien holders’ as described above and have six (6) years to sue you. UNLESS, and this is big, the seller gets the lender to release the homeowner from any future liability as to the forgiven debt