By Mark Sweet, ESQ

Today, the reality is that many people are walking away from their homes at record rates.  Many people will either go into foreclosure or try a short sale.  In a shot sale, the common understanding is that the bank will accept a bid for less than the house is worth. 

Why banks accept short sales

The reason a bank will accept this deal is because they:

• Can write off the losses as part of their yearly tax bill.  This helps to save the banks money because they have something to balance their profits against
• It is good business.  Not only does it look good for a bank to “help out homeowners,” but the new purchasers might even be using the same bank
• It probably saves the bank money.  The bank has another option, to foreclose the home and then try to sell it.  With home values fluctuating and the difficulty in selling a house, if a buyer is already set-up then why wouldn’t the bank accept an offer?

Bank’s suing ex-homeowners.

So the bank has three good reasons to accept this deal.  What else can a bank do? They can sue the previous homeowner for the amount they still owed (in the case of a foreclosure) or for the difference in the purchase price and how much was owed.  These suits are called “deficiency judgments.” This means that the bank is suing you for the “deficiency” or the difference in the amount you owe and the amount the bank has received.  The bank does not need to start a lawsuit immediately, in fact the bank can wait several years before instituting proceedings. 

Many times the bank will sell these payments to a collection agency.  The collection agency will then do whatever it can to collect the payments due.  Remember, the collection agency will take the position that the bank previously had and has the same rights the bank would have. 

Tax Implications

Additionally, when a bank forgives your debt, you may be stuck with a rather large tax bill.  The government will usually consider the amount of money the bank has forgiven as income.  This means that you will be taxed at your income rate.  However, under the Mortgage Relief Act of 2007 you may be able to escape that liability with the filing of a few forms with the IRS under a Form 982. However, there are several loopholes and rules with these forms and it is best to contact a tax professional.