If you struggle with your monthly mortgage payments and worry about your ability to hold onto your house, you may wish to consider negotiating a short sale with your lender. A short sale may permit you to walk away from your mortgage without devastating your credit score. However, the short sale process comes with a number of little-known pitfalls. If any liens or abstracts of judgment are attached to your distressed property, you'll need to adjust your approach.
A Brief Introduction to Short Sales
The short sale process isn't hard to understand. Homeowners who negotiate short sales with their lenders are permitted to sell their homes for less than the outstanding balance on their mortgages. In other words, short sales may prevent "underwater" homeowners from abandoning their homes. Although short sales come with plenty of complications and pitfalls, they usually results in outcomes with which both parties can live.
Short Sales vs. Foreclosures
Short sales and foreclosures both force mortgage lenders to take losses on outstanding mortgage debts. The size of these losses can vary tremendously. Since foreclosed homes tend to be in worse shape than short-sold homes, they generally fetch less money on the open market. By contrast, short sales are sold in the regular course of business and may produce only modest losses for lenders.
Abstracts of Judgment
Abstracts of judgment are formal documents that outline the terms of a specific judgment against an individual or entity. Although abstracts of judgment are often used as the legal basis for debt liens against pieces of real property, they're subordinate to "senior" secured debts like back-tax liens and mortgages. Additionally, not all abstracts of judgment become liens. However, this discussion assumes that distressed homeowners must contend with "secured" abstracts during the short sale or foreclosure process.
Can a Short Sale Affect an Abstract of Judgment?
Heavily indebted homeowners who find themselves at risk of eviction often attempt to save face and salvage their credit scores by executing a short sale. The short sale process has plenty of tangible benefits and produces fewer financial side effects than foreclosure. Unfortunately, these benefits can actually hurt some homeowners. Since short sales show up on real estate records and credit reports as regular home sales, they're legally indistinguishable from run-of-the-mill transactions that occur between solvent buyers and sellers. As such, short sales are rarely sufficient to put liens that arise from abstracts of judgment to bed. On an individual basis, it may be possible for sellers to work out mutually agreeable deals with their mortgage lenders and lien-holders. However, homeowners should not bet on this outcome.
Other Options for Struggling Homeowners
Since abstracts of judgment are designed to "secure" judgments that would normally take a back seat to senior forms of secured debt, they generally aren't forgiven during the short sale process. However, homeowners who have little hope of staying current on their mortgage payments have some other options at their disposal.
Foreclosure has the same practical effect as a short sale: It absolves the homeowner of further responsibility for his or her mortgage payment and closes the books on his or her relationship with the lender. During the foreclosure process, liens that arise from abstracts of judgment may be settled by the proceeds from the property's sale or negotiated away in some other manner.
Likewise, bankruptcy absolves homeowners and consumers of many forms of debt. By declaring bankruptcy, a homeowner may be able to renegotiate the terms of his or her mortgage or settle this debt outright. He or she may be forced to sell other assets in order to settle lien-related expenses.
Of course, foreclosure and bankruptcy do serious, long-lasting damage to consumers' credit scores. Homeowners who aren't in grave financial distress should initially attempt to preserve their credit by negotiating a short sale. The financial effects of an "overhanging" abstract of judgment usually pale in comparison to the credit-score carnage that foreclosure and bankruptcy can cause.
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