13 Apr Bankruptcy and Short Sales
Should I try a short sale, file bankruptcy, or both? That is the question. Do short sales and bankruptcy make sense together? The answer is, not usually.
Often when people are in the eye of a financial storm they address problems piecemeal. They may try credit counseling for credit card debt, an offer in compromise for tax debt, and to get out from under a burdensome mortgage they might try the obvious: selling their house. The problem with this last idea is obvious, if the house is “under water” or, in other words, saddled with a mortgage worth more than the house, one can’t sell it without the lender’s permission. That’s called a short sale.
A short sale happens when a lender agrees to allow a person to sell his house for an amount that does not result in the mortgage being paid off. Along with mortgage modifications, short sales are a useful tactic to try when a mortgage is the main source of trouble. There are also significant credit reporting advantages to a short sale over the alternative, a foreclosure.
But in bankruptcy it’s a different story. The main purpose of a short sale is, after all, to get out from under a mortgage debt. This can be achieved by “surrendering” a house in bankruptcy. This is possible in either a Chapter 7 or Chapter 13 bankruptcy. The surrender to the mortgage lender, however, still will occur via a foreclosure. That’s how a mortgage lender gets the house back after it’s surrendered. This results in some credit reporting damage, but the homeowner walks away from the mortgage debt with no deficiency debt. Consequently, a short sale is often unnecessary when someone has multiple debt problems and bankruptcy is inevitable.
However, with all that being said, a short sale can be possible and even advisable if the homeowner has the energy and the desire to avoid a foreclosure on his credit record (in addition to the bankruptcy) after the bankruptcy case is over. The timing on these post-bankruptcy short sales can be tricky. Ask your bankruptcy lawyer if this is an avenue you are interested in exploring. He or she may be able to refer you to a real estate broker experienced in short sales.
Nicholas Ortiz, Boston Bankruptcy Attorney
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