Very true Nancy, if either of the lenders choose to pursue a promissory note or a deficiency judgment then the seller does have the option to file a bankruptcy, even though in most cases I've seen the promissory note would leave the seller in a better position (especially because the seller may be able to renegotiate a discounted payoff after several on time payments). Also, after speaking with an attorney I'm led to believe that the new bankruptcy code may require the seller file a chapter 13 if their income is above the state median. Chapter 13 of coarse is a repayment plan and not a removal of all debts.

Well, you can look at it in several different ways. The first lender cannot come after the seller, but the second lender can, as what we are seeing in this case. The seller can go ahead with the "short sale" and if they cannot work something out with the second lien holder, the seller always has the option of filing bankruptcy which will wipe the note out. Either way, the seller still comes away with nothing. The second can and may ask the seller to sign a note for repayment of the amount still owed on the property as a condition to providing "short sale" approval.

I know this is an old post, but it brings up an interesting transition that's been taking place with promissory notes like the one referred to by Erin.

We negotiate short sales for Realtors and homeowners for a living so see a lot of different scenarios, but promissory notes have been changing. Over the last year we saw more of them , especially from second lenders that were getting hammered in the transaction. But, over the past few months the seconds have been playing a little more hard ball (presumably because people weren't paying on their promissory notes). Now we're seeing some of these second position lenders requiring 10% of their loss or they're letting the transaction go to foreclosure. This puts a lot more strain on the parties involved... where does the money come from? The first lender will only give 1-3K usually. So, if the seller is going to be offered a promissory note, this may not be that bad of an option these days, especially if we can negotiate the terms down to something manageable.

probably not typical, but I suppose they can ask for about anything... after all they are getting hit from all sides sometimes... I've included a great article I read that sheds a little light on short sales. I hope it helps and perhaps someone else will be able to reply as well. Best of Luck!

Jeff Campbell http://www.MainesHomeInspector.com