Help on a foreclosure

[Jimmy Hong]

I relative of mine has been having financial difficulties since the fall of the Lehmen Brothers and AIG and has a property that hasn't been paid off. The bank foreclosed and auctioned the property away for $130,000.00. The thing is my relative bought that property for $500,000.00 and the bank hired an appraiser who valued the property at $300,000.00 - $400,000.00. Now they are suing for the remainder of the balance. Is there anything he can do?

PS. He had a friend of his that was willing to buy the property and pay off all the taxes and such but the bank declined.

[Jon Holdman]

So your relative did a "subject to" deal and sold the property to someone who assumed his or her loan. Right? Or a lease option or something else? In any case, he or she retained both ownership of the property and responsibility for the loan.

The payments weren't paid, the bank foreclosed, and they are now coming after him or her for the deficiency. Banks generally only do that if they think the previous owner has assets. If the property is a primary residence and the owner is now out of a job and has no income and now assets, the bank writes off the debt. The government even has a program to void the tax bill that's due on the forgiven debt.

Based on what you wrote, that's not the case. Your relative made an investment. The value declined. Payments weren't made and rather than sell at a loss and pay $100-200K in difference, they let the property go to foreclosure. Now there's a $370K shortage. Unfortunately for your relative, that's the deal they made when they chose to let the property go to foreclosure rather than deal with it while they still owned it.

What to do now? Pay the bank $370K. No doubt plus additional costs that have been tacked on. Negotiate for a lesser amount. Declare bankruptcy like Curt says.