Deficiency Lawsuits Increasing

In our practice we have noticed that more Clients are experiencing deficiency lawsuits–but not as a result of a foreclosure. These Clients have sold their homes—they were short sale sellers—and failed to negotiate a release of personal liability as a part of the short sale transaction. Many were not aware that negotiating such a release was an option, nor were they aware of the risk they were taking by selling without obtaining a release of personal liability. Arizona’s anti-deficiency statutes do not apply to short sales. Release of the real estate lien on a home does not release the borrower from financial responsibility. It is a harsh thing to learn these facts after a claim has been made.

With the large volume of short sales in Maricopa County,we anticipate that the numbers of these lawsuits will only increase. So what do you do when faced with such a claim? The amount of these claims can be very large and payment is often not possible.

The answer starts with a complete review of all of the documents generated during the course of the short sale as well as all loan documents evidencing the financing on the home sold. Many times defenses–either partial or complete–can be developed. Modest settlements can often be negotiated. Third parties, usually the Seller’s Real Estate Agent, may be fully or partially responsible for this loss if they did not adequately disclose and inform the Seller of the risks they were assuming.Where a third party has responsibility the cost of settlement can sometimes be shared or shifted entirely. The lender, itself, may not have custody of the original documents upon which its claim is founded and this can create vulnerability. Most of the time a well researched response will result in an affordable resolution of these claims. Where this is not possible, a final option is to consider filing Bankruptcy under Chapter 7 or 13. Bankruptcy, however, is often unnecessary.

Contact a Bankruptcy attorney for more information.