Short Sale or Bankruptcy? Which is better?

18 Mar Short Sale or Bankruptcy? Which is better?

Some people just want to avoid bankruptcy at all costs. Some people are not eligible for bankruptcy because they filed for chapter 7 bankruptcy less than 8 years ago. Can a short sale help?

In short sales, a house is sold for less than the amount due on the mortgages. How does this work?In a short sale, the first mortgage holder gives up its mortgage in exchange for whatever was left after sale, taking into account brokers’ commissions and closing costs. The first mortgage holder often demands the borrower to pay the difference over time. The second mortgage holder won’t release its lien for nothing. It wants some of the first mortgage holder’s money too and it also wants a promise from the homeowner to pay some of the debt – maybe thousands of dollars – in the future. These long term obligations to mortgage companies may not be in your best interest.

In chapter 7 bankruptcy, maybe the debtor will lose the house, but liability to both the first and the second mortgage lenders will be wiped out. Even in chapter 13, the debtor can often get rid of second mortgage by “lien stripping” and keep the house by making payments over a period of 3 to 5 years.

Before you sign up with a short-sale “specialist” ask how a short sale will help you. Then ask a consumer bankruptcy attorney how bankruptcy options in chapter 7 or chapter 13 compare to the short sale. Only then can you make an informed decision

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Jay S. Fleischman is a bankruptcy lawyer with offices in Los Angeles and New York. He can often be found on Google+ and Twitter, where he shares information about consumer protection issues and personal finance.
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