Question.   My name is (name withheld) and I allowed myself to write to you after hours spent on the real estate blogs. We sold our house in Lake Stevens, WA in November 2008 in a short sale. My husband acted on my behalf and signed a promissory note with second lender for $8600, with payments of almost 75 dollars. My husband signed a note because we were informed by our broker and a Escrow Company, that this note will stay in our file (whatever it means), until we purchase our next home, and then the second lender can go after assets from our new home. We understood that we will not be personally liable for this note, so even after a  judgment my husband’s wages cannot be garnished. We cannot find any info about that on any blog, so we would really appreciate any thought.

Answer.   I’ll share a few thoughts about the law on promissory notes and your obligations, but I don’t know all the facts of your case, and I have not seen your documents.   I am retired from law practice, so what I do share is not rendering a legal opinion, and I would recommend you see an attorney to address the legal issues and your financial obligations.   I will talk generally about notes and the obligation on notes.

When you sign a promissory note, you are personally obligated on that note under the specific terms of that note, which in your case apparently was $75 per month.   According to the terms of most standard notes, if you do not make the monthly payment, you are in default.   The company that holds the note and to whom you are obligated to make payments could sue you and obtain a judgment in court if you are in default.   With that judgment they could enforce their legal right by attaching your assets (those not exempt) and garnishing your wages.

If you sign a promissory note, you are obligated, and it doesn’t matter where they put the note (in a file, in a drawer), the note is still a legal obligation that they can enforce against you.

I know that probably doesn’t alleviate your difficulties, but I hope this information is helpful.

Chuck E. Marunde, J.D.

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What effect does a foreclosure or a short sale have on your credit score? Negatives on a credit report are scored by three factors: recency (how recently did the negative event occur), severity (how late is the payment) and frequency (how many times you’ve been reported delinquent on credit obligations). If you have payments in default on a mortgage, your credit score is taking some hits, but if you have a foreclosure, you will not be able to get a Fannie Mae or Freddie Mac backed loan for five years.

If you have a home for sale that is threatened by a possible foreclosure, you may have to try to sell it for less than the current mortgage balance. If your mortgage company accepts less than what is owed, that is a short sale. Trying to do a short sale is not for the inexperienced homeowner or the inexperienced real estate agent. It’s very technical, and you don’t want to screw it up.

Lenders prefer short sales over foreclosures because they net more from them. Foreclosures incur additional legal costs and fees, carrying costs, and marketing costs. Your credit score is downgraded with a short sale, but not as much as a foreclosure.   Borrowers can be considered for loans following a short sale after 24 months, if the sale was caused by extenuating circumstances outside of a borrowers’ control, or 48 months if it was the result of financial mismanagement on the borrower’s part of the homeowner.

There are potential tax implications with a short sale.   The IRS code penalizes you if you do a short sale by taxing you on the forgiven portion of the loan, the difference between what you owed and what the mortgage company accepted in the short sale. It’s hard to believe that our government would tax you on a short sale when you are already in severe financial hardship, but who said our tax code was fair?

Because of public outcry, congress made an exception to the IRS code. The Mortgage Forgiveness Debt Relief Act of 2007 and the recently passed Emergency Economic Stabilization Act allows you to exclude up to $2 million of income ($1 million if married filing separately) from debt that’s discharged through mortgage restructuring, or that’s forgiven in connection with foreclosure, for the years 2007 through 2012. The exclusion must be connected with a decline in the home’s value or the taxpayer’s financial condition, and only applies to a principal residence, not investment properties.

If you own a home you need to sell, this is absolutely not a time to experiment with selling prices and marketing.   It’s not a time to hire an inexperienced real estate agent.   You may only get one chance to do it right, and time is your enemy.   If you do everything right from the beginning, in four or five months, if your lucky you’ll have a closed sale.   Trip along the way on any of dozens of steps, and you will lose, and the consequences could be devestating.   The key to getting it right is finding an experienced professional who knows exactly what to do and when to do it.

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