Settled Debt or Paid Debt? – Short Sale Issue

Question: I made a short sale and I am about to close it. The amount of money that I owed the bank was 132K but I have been allowed to sell my house for 40K. The bank has agreed not to pursue the difference in amount but will report it to the credit bureau as “settled for less than the amount owed”.

Recently, I got a call from a mortgage company representative who asked a great number of questions. He wanted to know what I thought of the origination process and informed me that the bank would not let go of the differential amount and file a claim. My question is how should a debt be reported now that the mortgage insurance company has paid the differential amount to the bank? Will it be “settled” or “paid”?

Answer: Your question has two different issues. The first one is of the settlement of debt and the way in which it will be reported. Since you settled for less than you owed, they reported it correctly. You can check your credit report to verify it.

The second question involves the issue where the mortgage insurance company has repaid the differential amount to the bank. According to a real estate expert, the insurance company has to approve the short sale before the homeowner can proceed with it. It is well within its rights to demand contribution of payment to the bank from the homeowner and if that does not happen, can stop the sale.

Contact a real estate attorney to help you through this short sale and protect your interests.