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Ten Frequently Used Short Sale Terms: A Guide

Lambros Politis - Wednesday, October 15, 2014

Every day we help consumers facing debt-relief issues. It’s our job to be comfortable with the language of the world of short sales and debt-relief— but not everyone is.

Here’s a resource to make it easier. Below I've briefly explained some frequently used terms. I hope you find this helpful!

Bankruptcy-Chapter 7 – In a Chapter 7 Bankruptcy, assets and debt are surrendered to the control of a Trustee who is capable of canceling most, or all debt. The Trustee may decide to liquidate assets in order to pay creditors. Chapter 7 bankruptcy also called “straight” bankruptcy is so named because debts are discharged and the borrower has the opportunity to receive a debt-free fresh start.

Bankruptcy-Chapter 13 - Often called debt-reorganization. Under Chapter 13, the debtor proposes a plan to pay his creditors over a 3-to-5 year period, to be approved by the Bankruptcy Trustee. A Chapter 13 Bankruptcy is generally suited for individuals who have property they want to keep and for those who have enough income to reorganize and satisfy some of their debt. In contrast to the goals of Chapter 7, which offers immediate and complete relief of many oppressive debts, Chapter 13 is a form of debt consolidation.

Deed In Lieu Of Foreclosure - The voluntary surrender of property by a homeowner to a lien holder done to prevent and eliminate foreclosure. Among the disadvantages to the homeowner (borrower) with this option is the loss of the property, its income, and loss of investment to date in the property. Additionally, the Deed in Lieu of Foreclosure can often be misreported, thus further negatively impacting their future credit.

Discounted Payoff - The payoff of a mortgage loan where the lender accepts a negotiated amount that is less than the actual amount owed. Discounted payoffs are reserved for homeowners with distressed assets.

Distressed Assets – An asset is distressed when the amount owed to satisfy the debt taken out to purchase the asset is greater than what the borrower can recoup from the sale of the asset.

Underwater Mortgage (also known as Equity Deficient) - A property is underwater when, if sold, the proceeds of that sale would not fully pay off the existing mortgage debt. In this situation, the balance owed on the home exceeds its current value.

Notice Of Default (NOD) - An official public notice filed and recorded by a designated trustee at the request of a lender indicating that they have begun foreclosure action. An NOD gives the homeowner a right to mediation in the State of Washington.

Notice Of Trustee Sale (NOTS) - An official public notice that is posted, mailed, published and recorded by the Trustee at the direction of lender indicating the lender's intention to sell the property at public auction after the homeowner has been in default on their mortgage for a certain amount of time. This type of notice includes a specific date, time and location of the foreclosure sale and the amount needed to cure the default. The Notice is issued 120 days before the sale by law. The homeowner can pursue an alternative to foreclosure up to 37 days before the sale, sometimes after depending on your lender. You are entitled to free legal help with a debt relief organization.

Short Sale - The sale of a home which is completed through negotiation with the existing lender where they agree to accept less than the full amount owed, allowing the debt to be 'paid off' short. In a short sale, there is more owed on the home than what it will likely sell for on the market. Lenders use the term to describe this as a loan that is “upside down.” While many short sellers are at-risk of foreclosure, a borrower who bought high and took out equity can also use a short sale should they encounter financial hardship.

Trustee Sale – This is also known as a Foreclosure Sale or Foreclosure Auction. Conducted by the Trustee, the property is sold at auction to the highest bidder, or taken back by a foreclosing lender should nobody bid on the property. If the lender takes the property back, it becomes REO inventory to be sold by the lender.

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