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When is the best time to negotiate settlement with the junior lien holder in 80/20 foreclosure?

Seattle, WA |

My 80/20 mortgage is going into foreclosure. I want to avoid being sued for deficiency by the junior lienholder, and offer to settle with them for lesser amount.
Should I try to negotiate now, or wait until the house is in foreclosure?

Attorney Answers 3


This is a very specialized area of law - it is almost impossible to handle this yourself properly, like doing your own brain surgery. You need a consumer law attorney who is knowledgable in mortgage foreclosure law to obtain the best result. The National Association of Consumer Advocates (NACA) is a non-profit consumer advocacy organization. NACA maintains a web site at where it lists geographically consumer law attorneys all over the US. If you don't already have an attorney, please look there for someone in your area who can help you.

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I can't advise you about timing but I can say from my experience that the junior lien holder will be more likely to believe a foreclosure may happen once one has begun. A thing to remember: forgiveness of indebtedness is a taxable event. This means that if the junior lien creditor forgives $50,000 of indebtedness you need to include that amount in your taxable income. Hard to believe isn't it? Check with your attorney and an accountant if you are planning on doing this.

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I practice in Florida so my answers are not state specific.

1. If this property is your prinicpal residence the income from the debt forbiveness of a short sale is NOT taxable. If it is investment property it is taxable as ordinary income BUT you should see a CPA for advice as you may have an offsetting loss on the sale of the property.

2. Most first lenders when approving a short sale only allow for $1000 or $2000 for the second lien holder if the first is taking a loss. Most second lenders understand this. You should submit the short sale simulataneously to both lenders as the process can take months and months.

3. Many lenders require that the property have been listed for sale from 1 to 3 months prior to approving a short sale in order to see what the market price is. You should select a realtor who is experienced (this is very important) in listing short sales and is willing to submit and negotiate the short sale for you.

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