Issues with Short Sales

October 31, 2010
Author: Eric Townsend

Short sales are more prevalent than ever and many Americans are using them as an alternative to foreclosure. Negative equity home owners see a short sale as a way of limiting their liability. Unfortunately, this is a mistaken belief and acceptance of the short sale by the lenders does not necessarily mean all future litigation of the remaining debt is barred. In some circumstances not only can the lender go after the short seller after the short sale, but, depending on the circumstances, the judgment could be non-dischargeable through bankruptcy.

With a myriad of state and federal laws protecting home owners most residential short sales approved by lenders will result in no future liability, but will remain in several circumstances. Some of these liabilities are created by the lenders and are strictly unenforceable under California state law. Others liabilities were created at the time the short seller created the loan for the subject property. In these circumstances it is very important to understand when there are legitimate and illegitimate liabilities places on the short seller. Once the short seller understands the legal ramifications of completing a short sale only then should action be taken.

Without understanding the liabilities a short seller may be subject to, or to assume an illegitimate liability, it is easy to place a short seller in a position of liability that could have been mitigated with adequate legal advice. In some, but not all, cases lawyers can use simple strategies to help prevent the future liability of these short sellers.

A short sale done properly should operate as a settlement because in fact the short seller is helping the lender to procure the highest proceeds through a non-distressed sale. These actions are valuable to the lenders, and should be used for bargaining the removal of the short seller’s liability, but only a licensed attorney can explain and guide these short sellers to that result.

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