A main concern that every homeowner should have when considering a short sale, deed in lieu, mortgage restructuring, or foreclosure is the potential of a Deficiency Judgment.

Deficiency Judgement Property GuidingWhat is a deficiency judgment?

For example, you purchased your home for $500K. You put $50K down and signed a promissory note and mortgage for the remaining $450K balance. Now in 2012, with the downward turn of the market, your home is now only valued at $250K. Unfortunately, you still have a $400K balance on the loan. In this set of facts, you have a deficiency of $150K. This deficiency is the difference between the value of the home ($250K) and the balance owed ($400K). In Florida, the lender can now go after you for this $150K deficiency and seek out a judgment against you.

In the above example, the home is considered to be “under water” and the borrower would be “upside down” on their loan. When this occurs, the potential for heavy deficiency judgments are all too real. If you have a substantial deficiency on your home, you would be ill advised not to speak with an attorney to discuss your options.

Deficiency Waiver

Needless to say, the first thing is to try to avoid a deficiency judgment altogether. Often times this depends on the actions of the borrowers. If the borrowers are being proactive, lenders are more likely to waive their deficiencies. Also, the “Big 4”: JP Morgan, Bank of America, Wells Fargo, and Citigroup are usually more open to waive a deficiency. Where you see banks routinely pursuing deficiency judgments are with the small local banks and the credit unions who cannot afford to swallow the loss like the bigger banks can. For our purposes, let us assume that the lender is willing to waive any deficiency against you.

It’s time to celebrate, right? No, even if you get your deficiency waived by the lender, you could still face steep tax liabilities for the cancellation of debt.

Typically, there are 3 ways to avoid deficiency judgment tax liability:

1)      Mortgage Forgiveness Debt Relief Act- This Federal law was enacted in 2007 and it generally allows taxpayers to exclude the forgiven/cancelled debt from their income if the debt was based on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure and short sale generally qualify for the relief.

2)      Insolvency- When your liabilities outweigh your assets, you are deemed to be insolvent by the IRS and as such, you are not responsible for the taxes on the forgiven debt.

3)      Bankruptcy- Debts discharged through bankruptcy are not considered taxable income. So, if you lose your home through foreclosure, enter into a modification of principal, or short sale the home and then file for Chapter 7 bankruptcy, you would not be subject to the requirement that your cancelled debt be included as income.

Join me in the upcoming weeks as we discuss the Mortgage Forgiveness Debt Relief Act and Florida law pertaining to deficiency judgments. If you are falling behind on your mortgage payments or facing a foreclosure in Southwest Florida, you should speak to a licensed Florida Attorney.

This is a generalized discussion on deficiency judgments in Florida and is not intended for any particular set of facts. By no means does this blog create an attorney-client relationship or privilege between the Attorney and the readers. If you would like schedule a free consultation, or have any questions, comments, or suggestions on upcoming topics, please comment below or email

The Guirguis Law Firm, PLLC
1423 S.E. 16th Place, STE 204
Cape Coral, Florida 33990
239.573.9939 Telephone
239.603.9939 Facsimile

Posted on July 25, 2012, in Legal and tagged , , , , , , , , , , , , , , , , , , , , , , , , , , . Bookmark the permalink. Leave a comment.

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