Foreclosure in Connecticut>Question Details

Maramara, Home Owner in Danielson, CT

with a short sale are you liable for any balance in a first and second mortgage?

Asked by Maramara, Danielson, CT Thu Feb 10, 2011

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Each state has different laws regarding recourse and nonrecourse loans. California just passed a law, SB931; 1/1/2011 that states: after the short sale of a residential property of 1-4 units, the holder of the first deed of trust cannot pursue the homeowner for any deficiency judgment. If the lender issues an approval letter, consenting the short sale in writing, the lender is obligated to accept the short sale proceeds as payment in full and must report to the credit bureaus as such, not ‘paid for less than full value’. Even if the loan is refinanced as long as it is a first deed of trust.

2nd can still choose to pursue a dificiency judgment, but if your agent knows what they are doing, in most cases can negotiate a full release. Unfortunately, most agents don't know how to do this or know the difference between a release of liability and release of lien.

As always consult an attorney and tax consultant for your personal situation. Beverley 619-227-9263
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1 vote Thank Flag Link Sat Feb 19, 2011
The answer to this quesitons has many arms. If you have a good agent and a good attorney that you work with on a short sell, you have a better change of limiting your liability.
1 vote Thank Flag Link Thu Feb 17, 2011
Hot Rod - The lender MUST send the 1099 once they forgive the getting out of that one is about impossible. Same with number 2. You're not going to get a lender to :
approve the short sale and forgive the debt
AND NOT issue a 1099
AND NOT report anything to credit
Its not gonna happen.
Short sales are not a get out of jail free card. They're an alternative to mitigate the losses of a bad situation.
Furthermore, unless the client has 20-50% to pay the second out of pocket, the second isn't getting 20-50%. The first will pay off the second, and not for nearly that amount. Its been my experience the second will usually settle/release for more like 10%.
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1 vote Thank Flag Link Wed Feb 16, 2011
Candace - just because you dont work enough short sales to know the answer to this question, does not mean others dont. Anyone who does lots of CT short sales can tell you - CT is most certainly a deficiency state, and whether the first and second release or forgive is a matter of who owns these notes, what their policies are, and what the terms of the approval are negotiated out to be. A CT lawyer experienced with short sales will tell you the same thing- if you need a number to a highly qualified real estate attroney to tell you what I just did, I am happy to provide the number as I work with the best.
I would also suggest you dont attempt to practice law by recommending bankruptcy when you have no idea what the OP's situation is.
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1 vote Thank Flag Link Thu Feb 10, 2011
Connecticut is a deficiency state - unless negotiated otherwise, the lenders can pursue you for the loss. The terms of approval for the short sale will be writtten in your approval letter. They may or may not be debt forgiveness. Get yourself a highly qualified short sale agent to up the odds of the best terms. By the way - since you have two lienholders, you cant do a deed in lieu ( prior question).
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1 vote Thank Flag Link Thu Feb 10, 2011
More and more banks are asking sellers to be personally responsible for at least a portion of the shortfall if they see assets and earning power. It is very important that you have a knowledgable person negotiating on your behalf with the bank. Speak with an attorney who has become a specialist in this.
0 votes Thank Flag Link Fri Apr 1, 2011
See my previous answer to the balance question, but if you are asking about tax liability, you will get a 1099 from each lender for the debt forgiven, that is law. Whether you can be exempt for the taxes is up to your CPA. There is a form, IRS 982, that you will have to fill out in the year you received your 1099's. If your CPA can prove that you were insolvent at the time of the short sale, your will owe no taxes. Insolvent means your debts were more than your assets at the time of the short sale. This includes your mortgage for the short sale. Most people can prove insolvency and are relieved of the tax liability.
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0 votes Thank Flag Link Tue Mar 1, 2011
Realtor Minna's answers look to be the most correct... follow her advice.

Another problem with a Short Sale if it is not your primary residence is you could end up with a significant Federal Tax liability. The lender will report the amount forgiven as ordinary income on a from 1099 to the IRS. If it's your primary residence you may qualify for an exemption. On a rental property, you cannot get that exemption. There may be other ways to avoid the tax consequences so in addition to talking with an attorney, you may also want to consult with a CPA that specializes in Real Estate "before" you sign a contract.

Hope this helps.
0 votes Thank Flag Link Tue Mar 1, 2011
Hi Maramara,

I would highly recommend that you contact a good real estate attorney with this question. Be sure to consult someone who has experience with short sales, and since real estate law can change significantly from region to region, it's best to consider professionals who also have experience in your neck of the woods.

Best of luck to you!
Agent Andrea
0 votes Thank Flag Link Mon Feb 28, 2011
Statute of Limitations for a deficiency collection in CT is 20 years. Why is that important to know? Language in the closing documents. Make sure you work with an expert RE attorney and agent. It's particularly critical when a second is involved. Your financial circumstances can change in the future for the better. Without specific language protecting you, the bank could come after you.

As I mentioned, to ad nauseam, those with good intentions familiar with other state laws other than CT, cannot answer this question, as well as those of us who are not licensed legal professionals
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0 votes Thank Flag Link Sun Feb 27, 2011
There is no clear cut answer to your question...Every short sale situation is differant.
0 votes Thank Flag Link Sat Feb 26, 2011
Hi, My name is Myra Strickland, There is not direct answer to your question. Each short sell works different. I have been able to get most of the debt forgiven with my clients. It not an easy process and it takes a good Realtor alone with a good attorney to fight for the best possible results.

While I know you would like a direct Yes or No answer, there simply is not a "once answer for all". The Bank looks at many things. Job status, how much debt you have, what are the chances that you can pay back the debt in the future, what are you assets, etc. A bank will be willing to work with you, if it is a lose all situation! Also another major factor is, what are home values in your area. The bank will not want to hold that home in inventory, so if a Short Sell will produce quick results over foreclosure, you stand a good chance of them working with you.

Another major mistake people make when asking the bank for a short sell, is they forget to remain "humble". The old saying you catch more flies with honey is true. The short sell folks are over worked, and hear the same story hundreds of time a time, you are nothing more than a number to someone sittting behind the desk, When you contact the bank, find a way to make a connection with your short sell rep. It will give you an edge. Good luck. If you have any more questions, e mail me at I can help you find a agent in your area to assist you with this process
0 votes Thank Flag Link Thu Feb 24, 2011
Hello, QUite truthfully an Attorney will give you the long and short of it. In NY State and as far as I know there have been little or few liabilities once the Short Sale is closed. It is usually contractual and no further liabilities are realized.
0 votes Thank Flag Link Thu Feb 24, 2011
It depends on your bank and realtor. Everything is negotiable. Make sure you don't have to sign a promissory note and that your debt is settled. Everything should be in writing on your approval letter from your bank, Make sure you read the terms.
0 votes Thank Flag Link Tue Feb 22, 2011
Realtors® do not provide legal advice, I would recommend you consult with a Real Estate attorney in your area.
0 votes Thank Flag Link Mon Feb 21, 2011
Hi -- the answer is maybe. In most cases, the bank holding the 1st mortgage gets 90% of the money in a short sale. If and only if the 2nd agrees to what's remaining for them, will they agree. In just about every case, I've seen the 2nd lienholder send the former owner a 1099, which means you must declare your "gain" as income when you file taxes. A rip off in my opinion ... Julie Montgomery, RE/MAX Masters, Inc.
0 votes Thank Flag Link Mon Feb 21, 2011
Hi Maramara, Whether your are personally liable will depend on many factors ,in what state you live in, And If it’s your primary residence or an investment property, it also depends in your actual situation. Every situation is unique, and every lender, investor has their own guidelines !

( This information is meant for general information purpose only is not to be construed as tax or legal advice, please consult your CPA or your state attorney for legal counsel )

It’s complicated, I will try my best. It can to be easy to understand !
Some states, Such as California, is a "non-recourse state" and banks cannot seek a deficiency judgment against the borrower if the loan was for purchase money on a residential one-four owner-occupied property. These loans are commonly referred to in the lending industry as "non-recourse" loans.

If there’s a second mortgage, HELOC, or other liens you are Personally liable from the debt that is a “ recourse - loan. With a Short sale you can negotiate to take care to avoid them later on !

The Good news is that California Gov. Arnold Schwarzenegger signed senate bill SB931 into law Oct. 1. The new short sale law prohibits mortgage holders from pursuing deficiencies after a short sale has been accepted. The law covers all first mortgages, and applies whether or not the property has been refinanced.

Home Equity Line of Credit. (HELOC). Second mortgages, other liens
This law doesn’t ’ apply.

Before S.B. 931, homeowners who sold their homes for less than the owed amount were still in danger of owing the amount bank was shorted, or the deficiency; only loans for “purchase money” were safe. Sometimes lenders were giving deficiency waivers, but
now it is required by law.

If you are facing a possible foreclosure, please don't give up hope and do nothing. Please contact me and let's talk.
In a 15 minute telephone call I can explain to you all the current options available to help you solve your short sale situation. ( 951) 858-5797 or send an email
I have extensive experience working short sales and am available to answer any and all questions you might have.
Through my English is not perfect I do have the expertise to help families avoid foreclosure.
The consultation is absolutely free and confidential.

Cecilia Rodriguez. Specialist in Residential Real Estate, Pre Foreclosures Distress Properties Expert, Certified Action Specialist.
( 951 ) 858-5797
Lic # 01505884
( 951 ) 858-5797
Lic # 01505884
Prudential California Realty
0 votes Thank Flag Link Mon Feb 21, 2011
My experience with short sales are varied. I had some that had forgiven the deficiencies altogether. This is mostly on owner-occupied homes. On second and investment properties, it is an entirely another ball game. I had some who were given options by the Lender whether they sign a Promissory Note at "0" Interest for a certain number of years or come to the closing table with a much smaller amount than the Promissory Note. One case in mind, the homeowner was asked for a $15K Promissory Note at "0" %interest for 5 years or a $4K upfront monies. My homeowner opted to bring the $4K to the closing table. It all depends on your Realtor/Negotiator and who the Lender is. Most of the time, Lenders will just issue you the 1099 and it's up to your Accountant how to handle your INCOME TAX. If he is good, your loss on the property (down payment and depreciation) will offset this 1099 income altogether. Better yet, talk to your Accountant first. Good Luck.
0 votes Thank Flag Link Sun Feb 20, 2011
It all depends on the state and local city you live in. I would suggest you talk with an attorney about your situation and to see which course of action best suits your needs.

Best of luck.
David Akram
Realtor, DRE# 01891274
Cell: 661-505-8550
Century 21 All Moves

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0 votes Thank Flag Link Sun Feb 20, 2011
There is no easy answer to this question. It depends on your circumstances, your lender, the payoff amount, the offer amount. I've gotten short sales approved for investors with full release and no deficiency judgement. I've also had primary residency home owners where the lender didn't waive the deficiency. It's a case by case thing, it depends on many things and there are no guarantees.
0 votes Thank Flag Link Sat Feb 19, 2011
This is usually an issue that is negotiated with the lender as part of the short sale process. Some lenders will forgive 100% and others will not. The attorneys that I use as negotiators fight very hard to get the unpaid debt forgiven completly.
Worse case they can usually negotiate the balance down substantially and the lender issues a promisary note with a resonable interest rate and time to repay.
However, when there is a second lien holder they seem to be more difficut to get the forgiveness because they usuallt are taking a hit for the entire amount owned.
Make sure you use a Realtor that has a working relationship with a law firm that is an expert in short sale negotiations.
0 votes Thank Flag Link Sat Feb 19, 2011
You are liable in all debt you created, so the answer is short, But lets look at the short dsale, the primary mortgage hold would accept you short sale process, and lets say you owed for si,ple example $100,000 on that mortgage or principle, and lets say you have a second mortgae and that is $20,000 on that. The primary has allowed you to do a short sale and you get an offer of $90,000 and the bank accepts, that accepted price does not mean that the bank may not go after you lter on for the remaining $10,000, and the secodary mortgage hold sure as hell is still going to go after you to get their money, especially since the home is no longer security for te note! nly if the fist and Second Mortgage grant you forgivness are you no longer liable, but remember forgiven debt will be treated as income and you will receive a 1099 form at year end so that you can claim it as a capital gain!
0 votes Thank Flag Link Fri Feb 18, 2011
The absolute best advice I can give you is to consult with an attorney or CPA. The whole short sale issue is extremely complex. U'm sorry to say that, unfortunately, many real estate agents do not know the answers.
0 votes Thank Flag Link Fri Feb 18, 2011
The short answer is 'depends'. The best advice is to talk with an attorney about your situation and to see which course of action best suits your needs. Good luck.
0 votes Thank Flag Link Fri Feb 18, 2011
Wow lots of legal advice below. There is a continuum from short sale, to foreclosure to bankruptcy that you must understand. If Conn is a recourse state, and Minna says it is, they can come after you for the first and 2nd mortgage. As for Bob movin on comment regarding an agent being responsible for negotiating the dificiency amount, THATS wrong. Listing agent would be acting as an attorney if negotiated a settlement for the shortage. Bears repeating, find a good real estate attorney and understand that every option you have has serious legal and financial consequences.
0 votes Thank Flag Link Fri Feb 18, 2011
Generally, if the lender has agreed in writing not to pursue a deficiency judgment against you after the short sale, then you are in the clear. However, if you have not received anything in writing from the lender releasing you from liability for the short fall, the lender may attempt to get a deficiency judgment against you.

The fact that the lender has agreed to the short sale does not mean that it has waived its right to seek a deficiency judgment against you for the short fall. In fact, many lenders will not agree to release a homeowner from liability for the short call and often wait several years before filing suit seeking a deficiency judgment in the hopes that his or her financial situation has improved. However, under the HAFA short sale program, participating lenders must release homeowner's from liability. However, this only applies to loans which are back by Freddie Mac or Fannie Mae.

In some states, such as California, lenders may only seek a deficiency judgment after a short sale in certain circumstances. I strongly recommend that you speak with an experienced real estate attorney in your area. A real estate attorney will explain all of the legalities and ramifications of a short sale to you so that you can make an informed decision before signing the short sale agreement.
0 votes Thank Flag Link Fri Feb 18, 2011
A short sale typically eliminates the first mortgage, and the balance owed to that lender is shorted, i.e. settling for less than the outstanding balance, and re-conveying the deed to the borrower free of that lenders encumbrance(s).

For the best protection for the seller and his credit, make sure the following two (2) clauses are in the short sale agreement:
1. That the Lender will NOT 1099 the seller (or any other IRS notice), for any differences between the amount owed and the short sale settlement amount, and
2. That the Lender will not report ANYTHING negative (including the settlement) to the big 3 credit reporting services, and will report that the loan is paid in full only.

NOTE: Failure to include these clauses with expose the seller to taxes (treated as ordinary income in that year) for the differences in Item 1 above, and create a huge obstacle for any future loans (not just RE) for failure to include Item 2 above.

As for 2nd's, 3rd's, ect.? Junior lienholders generally have the right to foreclose, as long as the senior lienholders are paid in full.

However, most of these subsequent lenders will negotiate to take a portion of the outstanding balances of the borrowers loans (usually between 20-50%), instead of having to 'eat' (write-off) the entire amount as a loss for a default of these junior loans.

Again, make sure to include the clauses in Items 1 and 2 above in these settlements as well, otherwise the same conditions in the 'NOTE' above will more than likely occur with these junior loan providers.

To say the least, these are complicated legal, tax, and contract issues.
To make things worse, dealing with lenders with teams of attorneys looking out for their best interest complicates the entire short sale and junior lienholder satisfaction process.

Therefore, seek competent legal and/or tax advice from licensed professionals in your state within those fields.

Good Luck!
Hot Rod
0 votes Thank Flag Link Tue Feb 15, 2011
The lender may obtain a deficiency judgment if the property is sold at a public sale for less than the loan amount. PA.. foreclosure laws are complex . As for a second loan generally they need to buy the first loan in order for them to proceed to collect their amount. Again, in some states there is no deficiency judgment law and therefore would not be responsible to pay back the difference. Keep in mind very seldom does the lender or bank go and file against the past owner for it is costly and they assume that if you did not have the money to pay the mortgage you are not in the position to pay back the loss. You are responsible to pay the taxes on any outstanding amount not satisfied at the foreclosure. IRS- this is in review and may be changed in the future.
0 votes Thank Flag Link Tue Feb 15, 2011
The key is any amount that will be a deficiency for the 1st and the 2nd mortgages should be negotiated when you short sale is submitted to your lender, You should be using a listing agent who is well experienced with short sales and a profesional negotiator who is negotiating on your behalf, the bank has their negotiator working for teh bank, so you need some one who is looking out for you. There are several parts of a short sale, please see my blog where i have a list of tips and advice on how to get a short sale approved.

Good luck with working things out
0 votes Thank Flag Link Tue Feb 15, 2011
Totally depends; on the balance amounts, the lender, and the situation. Sometimes the lender will "forgive" the balance - which then becomes income as far as the feds are concerned - which can be problematic if you are in a short sale because you don't have the money to meet your mortgage and now you have a big tax liability. But more often than not, that debt sits there until you become more financially solvent and then they'll collect on the balance. Consult with a local lender to find out the specifics of your case.
0 votes Thank Flag Link Mon Feb 14, 2011
Ladies, please play nice. If you have an issue with each other, please continue it in private. Regardless of who is right and wrong, you two are making all of us look bad with petty, unprofessional behavior.

I do not practice in CT, only Mass and RI so our common practices may differ. But... When I find a homeowner in distress, I will definitely look at the situation closely to see if selling Short is the way to go. Hopefully they can avoid the situation with a Loan Modification. If not, we do the comps and gather all the documentation to forward to the Attorney our office uses. This puts the CLIENT in the best position to walk away free and clear.

Remember, its all about the client and not our egos or bottom lines!!!
0 votes Thank Flag Link Mon Feb 14, 2011
That should be addressed/negotiated in the short sale if not your Realtor is failing you.

Bob Patrick
Buy a home after foreclosure, short sale or deed-in-lieu-of
Movin-On LLC
Helping families/people that have lost their homes get back into another in as little as 6 months
0 votes Thank Flag Link Sun Feb 13, 2011
GREAT QUESTION: No professional can render an opinion for your best interest recommend to confer with an attorney AND read all the fine print lender requires you to sign

Lynn911 Dallas Realtor & Consultant, Loan Officer, Credit Repair Advisor
The Michael Group - Dallas Business Journal Top Ranked Realtors
0 votes Thank Flag Link Fri Feb 11, 2011
Again, anyone in financial distress should contact an attorney and accountant, first. This person asked at least 2 questions about the ramifications of a short or "Handing in the keys." A qualified person such as an attorney who is an "expert" in the field of RE, shorts, foreclosures, chapter 7 and 13 will assess your financial circumstances, through a "Means Test,." By assessing your specific financial predicament.they will advise you best on how to proceed to protect you in the future. I am afraid there are no simple answers. Find out your options first. You may find out that there will be painful decisions. On the other hand you may just avoid that feeling of helplessnes and avoid becoming "hysterical." Once you find out all your options and the attorney helps you make an informed decision, then and only then will they recommened a RE agent to represent what is best for you in the long run. It maybe a short or maybe an opportunity to reorganize. You just might be able to save your home and your future. There are many State and Federal agencies and programs that may shed better light on your specific situation. Do your research and then make an informed decision. I have many clients ask what is best for me, not what is best for me as the agent. I always recommend they speak with an attorney first. I am so sorry for your discomfort and angst.

"Your Beacon to Fairfield County Lifestyles"

Candace Lipira, Realtor
Keller Williams Platinum Properties
203-856-8501 cell
203-544-9786 home
0 votes Thank Flag Link Fri Feb 11, 2011
Means test - for a short sale? Candace please just stop before you prove your lack of expertise even further. Its very clear you have never actually been involved in a short sale. Reading an article about something doesnt make you fit to advise others on the subject. Its agents like you that make the crisis worse by giving bad advice, and causing confusion and hysteria for homeowners. I hope you just say no to short sale listings and refer them out. Really I do.
Consulting a lawyer is ALWAYS good advice...Answering every question you dont really know the answer with a standard "consult an attorney" advice is unnecessary. Are the points really worth it?
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0 votes Thank Flag Link Fri Feb 11, 2011
Just making observations and I'm afraid that I have done enough research on short sales that most situations cannot be answered by agents since they do not have enough legal knowledge. I never said anything definitive. A means test needs to be done in order to see if a client qualifies for a short. Valuable time can be wasted. There are multiple ways to approach a clients specific situation, One maybe a bankruptcy because many times an agent will do a short and the client is left with a defiency that they cannot pay. So their was no legal advice, just a suggestion for this person who asked multiple questions, to consult with a CT licensed attorney.
Again, to the person who asked this question. Please consult with an attorney how best to proceed based on your particular financial status..
It becomes very difficult for a buyer and seller who have come to an agreement to only find out in the end that a short will not work.
Again, consult with an attorney.
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0 votes Thank Flag Link Thu Feb 10, 2011
It sounds like you are having a difficult time and the best thing you can do is contact a Real Estate Attorney that can help you. There are many options available for you and depending on your situation you will get the right direction. Get a consultation since this is a legal matter and your future. If you need more information on who to contact, please let me know.
Kind Regards,
Nancy Collins
0 votes Thank Flag Link Thu Feb 10, 2011
Please contact an attorney. No one answering this question is qualified enough to make braod statements. With a second, yes difficul, which is why you need a highly qualified Attorney and bank to work out. Bankruptcy maybe another option.
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0 votes Thank Flag Link Thu Feb 10, 2011
Hi Maramara,

The goal is to get your lenders to relieve you of all future responsibility in exchange for the money they recieve. You need to make sure that you see this verbage in writing before completing a short sale. There are also laws in place by state, so you can check with a Realtor® and/or attorney about the laws in your state.

0 votes Thank Flag Link Thu Feb 10, 2011
Please contact an attorney. It will all depend on your personal financial circumstamces. You asked a different question about handing keys in. I doubt there is anyone answering questions on this site who can advise you properly, since attorneys don't spend the time on these sites. Again call an attorney and your bank. Get advise and deal with it appropriately
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0 votes Thank Flag Link Thu Feb 10, 2011
Sometimes. We need to negotiate with the bank. It depends on the bank and it also depends on the seller's financial standing.

We are a professional short sale service and would be happy to explain the process to you. Please call us directly to discuss your specific situation. Our services are FREE to homeowners. We look forward to hearing from you.

Eli Givoni, Director
Short Sale Department, LLC
Serving all 50 states
0 votes Thank Flag Link Thu Feb 10, 2011
Every situation is unique. The lender has the option of seeking a personal guarantee for the difference. They will evaluate your financial situation, assets, job situation, and the shortage and make a decision based on all the facts of your case. You should probably seek the advise of a lawyer that specializes in short sales. You should also use a Realtor that knows about how to prepare all of the documentation for a short sale package. If it isn't correctly submitted, your chances of a timely approval fall way off.

Dan Ross, SFR
(860) 736-1002
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0 votes Thank Flag Link Thu Feb 10, 2011
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