Q. I currently live in California. I short saled a property that is out of state. California is a non-recourse state, however, the short saled property is in a recourse state (Illinois). Currently there is a unsecured loan balance remaining and I want to settle the debt without hurting my credit. I plan to use your “debt settlement” letter. My question is what is an acceptable amount to negotiate when I reside in a non-recourse state?
A. Twelve states are “non-recourse states”. In these states, the bank is prohibited from going after a homeowner for the balance of the mortgage post-foreclosure or short sale. The non-recourse states are California, Arizona, Alaska, Connecticut, Idaho, Minnesota, North Carolina, North Dakota, Oregon, Texas, Utah and Washington.
Your strategy really depends on what legal recourse the lender might have against you. Typically, a creditor must sue you in a court which is the proper venue. Proper venue means a court in which it would not be a hardship for either party in the suit to appear in person. If the lender tries to sue you in Illinois court, you can file a motion to dismiss based on improper venue.
If the lender sues you in California court, can the lender still use Illinois law? In some cases, yes, California has ruled on cases using the foreign law of another state as the basis for its decisions.
I am not a laywer, but even if I were, I couldn’t tell positively tell you if the court would allow Illinois law to be used in your case. Courts decide such matters on a case-by-case basis. I did a little digging online and found the following legal opinion from the Los Angeles County Bar Association:
A California state court will apply California law unless a party invokes the law of a foreign jurisdiction. Thus, attorneys convinced that the law of another jurisdiction should apply in their case in a California court must bring the choice of law issue to the court’s attention. Under the choice of law approach in California, California law will be applied unless the foreign law conflicts with California law and both California and the foreign jurisdiction have significant interests in having their respective law applied. If there are significant interests and those interests conflict, the court must assess the comparative impairment of each state’s policies. The law ultimately applied will be that of the state whose policies would suffer most were a different state’s law applied.
Since it is not cut and dried on whether the court would allow Illinois law to be applied, I think you are in an excellent negotiating position in which to get your debt settled. How much should you offer in your initial debt settlement offer? I would start at 25% and go up from there. The lender is under no obligation to accept your offer. However, they may adopt a “better accept some than wind up with none” type of attitude.
One note: if you sell your home in a short sale, there is no way to avoid hurting your credit. The short sale will probably appear as a foreclosure on your credit report. If it doesn’t show as a foreclosure, the best you could hope for is a “settled for less than owed” notation on your mortgage account, which is still negative.