Short sales and 401k's

16 years ago

My friend is considering proposing a short sale to their lender. She insists that the lender cannot touch their 401k's and/or retirement accts.

True??

How about if they own another property (no equity in it as of now). Could they put a lein on that property or force a sale?

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Comments (3)

joann23456
16 years ago
She's right that, with few exceptions, IRA and 401k accounts are exempt from seizure. So, if she goes into foreclosure and there's a deficit after the house is sold, the bank won't be able to take her retirement accounts.

However, she's trying to avoid foreclosure by doing a short sale. To do that, she has to convince the bank that it's in its best interest to take less than the mortgage is worth, either forgiving the rest of the loan or entering into a new loan agreement that is not secured by the subject property.

As part of the short sale process, the bank will require her to provide full financial disclosure. The bank is trying to determine whether there's any money, anywhere, before they let her out of her obligation. If she's got money sitting in retirement accounts, the bank is unlikely to agree to a short sale that doesn't involve her using those funds to reduce the debt. (Why would they?) So, even though the bank can't directly reach the retirement accounts, the bank will take the money into consideration when deciding what sort of deal to structure.

As to whether the bank can put a lien on other property, it depends. After a foreclosure and a sale at a deficit, the bank could certainly put a lien on the other property. After a short sale, it depends. If the bank doesn't forgive the deficit after the short sale, your friend will end up with an unsecured loan to the bank for the deficit. If she lives up to the terms of the loan, then the bank would not be entitled to put a lien on the other property. If she defaults on the loan, then yes, the bank can bring legal action and put a lien on the property.
saphire
16 years ago
I think she needs to consult an attorney and not rely on your advice or that of random people on the internet. The Bank would have to get a non bankruptcy judgement against her before they could even think of putting a lien on her other house. Perhaps they could get such a judgement. Otherwise The bank would become her unsecured creditor unless she agreed to a lien as part of a short sale. Although why would she? As for the 401k, it becomes a question of how much they want to go for bankruptcy. Since they cannot touch it in bankruptcy, any smart attorney would point out that they cannot get anymore in bankruptcy so why not go for the short sale, get what they can now without the 401k
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etznab
16 years ago
Your friend is right that the bank can't touch her retirement account directly... but the bank can set the terms for the short sale, including bringing money to the table. And this may force your friend to dip into her retirement account.

The bank will require full disclosure of all financial info, including assets (income, retirement funds) and liabilities (utilities, cable tv, cell phone). The more luxury expenses that you have, the more likely it is that the bank will insist that the seller make up some of the difference in the short sale.

In a short sale, the bank agrees to take less than is owed. But there is no guarantee that they will agree to forgive the entire debt. Depending on the amount involved and the assets of the individual, the seller may still be required to cover at least part of the outstanding debt.

But sapphire is right ... you need an attorney AND a CPA. There may be implications for a short sale.

Short sales and 401k's

Comments (3)

joann23456

saphire

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