How Deficiency Collections May be Challenged

Madeleine Jones
March 22, 2017

Nevada debtors who choose short sales in lieu of foreclosure may have to challenge their banks’ attempts to collect the deficiencies that are left following the transactions. The law allows mortgage lenders to collect the difference between what they received from the sales and the original mortgage amounts unless the borrowers secured from the creditors’ waivers of their rights to seek the deficiency balances. However, creditors must comply with the requirements of the law, and failure to do so may allow the debtors to challenge collection attempts. A debt lawyer can review how the bank has attempted to collect a client’s deficiency in order to determine whether a legal remedy may be available.

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Legal Requirements for Lenders

Nevada places several requirements on mortgage lenders and banks before they can collect on deficiencies following short sales.

Time Frame

The lenders must seek the deficiency within six months of the sale.

Amount of Money to be Collected

Creditors may only recover the lesser of the two following:

  • the difference between the amount of the total debt and the sales price, OR
  • the difference between the amount of the fair market value of the property and the total debt owed

Deficiencies that Cannot Be Collected

Some deficiency collections in the state are forbidden. If the borrowers have lived continuously in a single-family home as their principal places of residence, and they owned it as of the date of the sale, financial institutions may not receive deficiency judgments for purchase-money loans that haven’t been refinanced. If the loans were made before Oct. 1, 2009, deficiency judgments are prohibited.

Challenging Deficiencies Collection

Nevada law directs that a hearing must be held at which both parties may present evidence. Debtors may ask the court to appoint an appraiser at least 10 days before the date of the hearing. The resulting appraisal of the home may be used as evidence in the hearing.

If the debtor negotiated with the financial institution for the inclusion of a conspicuous waiver in the short sale agreement, then the lender may not seek the deficiency. When debt lawyers help their clients to negotiate short sales, they work to secure these waivers and to make certain that they are included in the contracts in order to protect their clients from deficiency judgments.