Getting Rid of a Promissory Note After a Short Sale

On 21.Feb.2011 in Blog, Books & Manuals

Ken Lawson, JD

In a large number of short sale cases, the lender has required the sellers/borrowers to sign a promissory note as a condition of the short sale approval. We often are asked if there are ways to get rid of that promissory note after the short sale is completed.

The answer is “Yes!” However, before describing the process to eliminate a

Promissory Note

promissory note after a short sale, it is important to review the facts. A short sale is normally approved by the secondary market investor, who we reach through the servicing lender. That bank or mortgage company to whom payments were made serves as a gateway to the investor. Once that investor has approved the short sale, along with requiring the promissory note be signed by the borrower or seller, the borrower then makes their payments to the servicing lender. Now, however, that note is an unsecured debt to the servicer. It is a non-performing asset that is more of a liability to the servicer than an asset.
After a year of so of making the payments, the servicer’s people responsible for managing this debt are different from who originally was involved. Their motivations are different and there is a great opportunity to negotiate away the promissory note that was signed as a condition of short sale approval.

Once you or your client has reached this point, an attorney can often negotiate settlement of this debt for a percentage of the note’s balance. Almost always, 50-80% is approved as a cash settlement. However, 25-50% is highly likely if the borrowers are employed in typical blue-color jobs, are of advancing age, or have deteriorating health. If the borrowers are approaching retirement, have major health issues, or their income has dropped, 10-25% becomes very reachable to settle and pay off a promissory note. At this point, even borrowing the money to pay this amount is worth-while.

Understanding the motivations of these servicing lenders is important and negotiating a cash payoff of a promissory note after a short sale becomes much easier for a much lower percentage if you catch the lender at the right time. This is usually about one year after the short sale.

Best wishes,

Ken Lawson, JD

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8 responses to "Getting Rid of a Promissory Note After a Short Sale"

Kevin McMahon says:

August 22, 2011 at 12:18 pm

Thanks for the information. After paying a promissory note to the PMI company for 1 year, the company sent me a letter stating the note is cancelled. They also sent me back all my payments. Is this some type of trap? Seems like it is to godd to be true.

Thanks.
Kevin
Ken Lawson, JD says:

August 24, 2011 at 10:09 am

This could be a trap, so you should seek the advice of an attorney. However, it is more likely that they found something done improperly on their part that required them to backstep and refund your monies. There are also executive orders that have put a moratorium on certain loan products handled by government-owned investors for specific periods of times, so this could have happened during one of those incidents.

In addition, there have been a number of lawsuits around the country that have caused many secondary market investors, as well as servicers, to take pause and make changes to the way they manage the foreclosure procedures.

So, whichever of these possible reasons for your creditor’s actions may be the answer to your question, you should still seek out the counsel of an attorney to look at your documents and properly advise you as to your fact situation.

Thank you for your comment and question.

Ken
Jon Arnold says:

January 29, 2012 at 8:25 am

Ken,

I have a promissory note for 22,000 from a short sale that was completed Sept last year. Is it too early to approach the servicing co with an offer to settle on it? Also, what is the advantage of trying to negotiate this myself vs having an attorney do it?

Thanks,
JR
Ken Lawson, JD says:

February 3, 2012 at 3:51 pm

It depends upon the creditor. Generally, I’ve been more successful in my law practice at about one year in with most creditors with promissory notes. It depends upon several factors: The agenda of the specific department within the creditor, how they perceive the financial condition of the debtor, and the age and income sources of the debtor. If the department is focused on collections, then they may resist settlement. If they are focused on eliminating slow payment of bad debt, then they may be more motivated to settle.

Thanks for your question. I’m glad we were able to discuss this more freely by telephone.
Jon Arnold says:

February 15, 2012 at 8:35 pm

Ken, thanks again for the help. Just wanted to provide an update, I was able to negotiate a 50% settlement on the promissory note. I low balled the offer, they countered with a number I was ok with but a bit over 50% and I countered that with exactly 50% and they accepted. Thanks for the tips, very helpful.
Ken Lawson, JD says:

February 17, 2012 at 11:14 am

You’re very welcome. Congratulations on your success. Your reporting back to us will be helpful to others.

Again, thanks.

Ken
Patrick Perlas says:

May 4, 2012 at 10:14 pm

I have a promissory note in the amount of $45,000 and they are asking $36,000 to settle the note. They asked for my financials and found out I am capable of paying this but they were looking into open credit lines my wife and I have with our credit card companies. I want to tell them that I don’t want to cure a debt with another debt and I am not in a position to do so since my wife decided now to stop working to care for our 4 kids.

I want to settle this note and get it off my shoulders since they are threatening litigation against me. The monthly payments are $500 plus for 84 mos interest free and first payment was due last Feb 2012. It’s now May and have not paid them since they did not accept my initial offer of $3,000.

What do you suggest ?

Thank you.
Ken Lawson, JD says:

May 8, 2012 at 11:13 am

The percentage they are asking you to pay is 80% of the promissory note. You did not say what the amount of the deficiency balance likely is, but in the cases we handle, the promissory note is usually anywhere from 20% to 80%. Assuming 80% (guessing high), then the amount of the deficiency balance is likely $56,250. If this is correct, then they are wanting 64% of the total deficiency you owe.

It’s not a bad deal to pay 64% or less of a deficiency balance with no interest payment. However, there are other factors at play. You did not disclose your age, education, and employment demographic. What they are willing to do is based upon their perception of your being able to be financially rehabilitated. For example, a disabled blue collar worker 67 years old is perceived to be not rehabilitated at all, so an offer of 1-10% would likely be accepted.

A debtor attempting to negotiate a deal has very little leverage, unlike an attorney. Could an attorney do a better job of negotiating your situation as it is? Likely. Especially if the attorney handles both bankruptcy and non-bankruptcy cases. Not suggesting you file bankruptcy, but an attorney who practices both bankruptcy and non-bankruptcy cases is perceived by the bank to be in a strong position in negotiating with them.

Now, I pointed out that generally the best time to negotiate out of a promissory note is about one year of making payments. You would then be dealing with different people in the bank, with different motivations to settle. You are taking the worst approach in terms of timing and nonpayment.

So, I would recommend you consult with a good attorney who can explore your options in light of the above. I suggest you print this answer and provide it to him/her as well.

I wish you great success in your situation, and thanks for the comment.

Ken