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Common Short Sale Issues

Posted on July 19, 2017 in

house for sale_debt lawyerA short sale is a sale of real estate that allows mortgagees who are underwater on their loans to quickly sell their property and get out from under the debt. Short sales are ideal for properties that are valued less than the total amount owed. However, to accomplish a short sale, all lien holders must agree to accept less than the total amount owed. Understandably, a lienholder may be hesitant to accept less than the debt.

 

Misrepresenting Tax Consequences

When a debt is partially or forgiven, the amount forgiven is treated as income to the debt holder unless an exception applies. Many lien holders, to get a quick payout, will minimize the tax consequences of a short sale to the owner which can result in substantial tax burdens.

If the owner is misled as to the consequences, he is unable to plan for the tax burden and may continue to suffer under the burden of crushing debt. The Internal Revenue Service will include the forgiven portion of the debt as income and tax the seller as if they earned that income. Sadly, the forgiven debt can run into the tens or even hundreds of thousands of dollars which can result in substantial tax debt.

Misrepresenting Secondary Debt Treatment

Another common issue results when sellers are told that forgiveness granted by the primary debt holder applies to all debtholders. However, secondary debt holders, such as deeds of trust, may not forgive the debt. Additionally, even if they do accept partial payment, they may sell the remainder of the debt to a collections agency which will pursue the seller months or even years later.

The result is that sellers are caught unawares by these collections agencies years later. Moreover, if the debt is recourse, then the collections agency is permitted to pursue legal actions for compensation (however if the debt is nonrecourse, then the collection agency can ask for compensation but cannot compel compensation).

Inappropriate Lender Requests for Seller Contributions

Some lenders will put pressure on the seller to sign over a note for amounts held in retirement or bank accounts. However, Nevada is a non-recourse mortgage debt state which means that lenders have no right to pursue those monies. Non-recourse debt means that the lender cannot pursue compensation outside of the terms of the contract. Mortgages secure the property as collateral. Therefore, lenders in Nevada are limited to compensation connected with the property.