Short sale debt cancellation is one of the most important aspects of getting out from under a home you can no longer afford to pay for. Without this “forgiveness”, all you have done is sell your home for less than you owe to pay off a portion of your loan. The bank can still come after you with a deficiency judgment for the balance of the mortgage. This doesn’t just happen with primary lenders. If you have refinanced your mortgage or taken out a home equity line of credit (HELOC), those lenders can do the same thing after you short sell. You might think you are free and clear then end up with creditors coming after you years after the sale is complete.

Be aware that releasing the title from liens is not the same as releasing you, the borrower, from your “promissory note”. This is the agreement you signed when you bought the house, stating that you were personally liable for paying back the loan. Even if the title is free of liens, you could still be on the hook to pay off the loan.

In the HAFA program, debt forgiveness is supposed to be structured into the deal. With a traditional short sale, this aspect has to be negotiated and agreed to by all the lenders. In either case, you should have your real estate specialist show you the portions of the contract that deal with debt cancellation. Then, you should make sure you get the appropriate forms from the bank and all secondary lenders at closing stating that your outstanding balances are cancelled or forgiven.