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How deficiencies after a short sale affect your debts

When you decide to go through with a short sale or foreclosure, the idea is usually that the mortgage company will take a lower price for the home and that you'll be able to walk away without paying the difference. However, there are times when the mortgage company may try to get a deficiency judgment, which means that you could have to pay the difference in what you owe.

Here's an example. If you get the mortgage company to agree to a short sale for $130,000 even though the home's mortgage is $150,000, there's a $20,000 discrepancy. That discrepancy should be ignored, but if anti-deficiency laws aren't in place, you could be left footing the bill for the remaining debt.

South Carolina is a recourse state, which means unless you get an anti-deficiency clause in your contract, you could find that the mortgage company tries to get you to pay the difference of what you owe versus what your home sold for.

Only around 14 states don't allow for deficiency judgments, and anti-deficiency laws don't apply to second mortgages or home equity lines, so if your debts lie there, you may be forced to pay back that debt unless you go into bankruptcy.

The only fortunate part of a deficiency lawsuit is that the mortgage company typically can only sue you for the difference between the selling price and the fair market value of your home. So, if the fair market value of that $150,000 home was actually $135,000, then you'd only be able to be sued for a grand total of $5,000.

Source: FindLaw, "What are "Anti-Deficiency" Laws?," accessed May 27, 2016

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