In a short sale, banks agree to accept less than the value of a mortgage, at a loss of profit. In many states, banks can pursue borrowers for these losses and it is completely legal. This is known as a deficiency judgment.
Avoiding a deficiency judgment
Don’t sign anything hastily and have a lawyer review the short sale contract to be sure the bank doesn’t hold the right to and doesn’t intend to pursue you in a deficiency judgment. Though there isn’t a tested method to stopping banks from pursuing you after a short sale for lost profit, proving to your bank that it will cost them more money to sue you is one way to prevent a deficiency judgment.
Prove your former property is worth more than the mortgage
Decline in home value across the country is what has made deficiency judgments nasty affairs. If you can prove that your home is worth more than the mortgage—which is very unlikely unless your former neighborhood is a stable market—you may be able to get the lawsuit thrown out. However, banks have well oiled loss mitigation departments that are unlikely to come after you unless they think you are a good target.
Because banks can sue you for loss profits up to five years, many will wait until you are financially solvent again before they hit you with a deficiency judgment.
Wage garnishment and asset seizure
If the court rules in favor of the lender in a deficiency judgment proceeding, lenders can legally seize assets that are non-exempt. Non-exempt assets are things that aren’t vital to your day-to-day existence.
They can also garnish your wages. This means they can legally deduct a portion of your paycheck, and there is nothing you can do about it.