21 Jan Should I Do a “Short Sale” if I’ll File Bankruptcy?
I’m often asked by clients about short sales. As I talked about in my blog, Why Short Sales Usually are a Bad Idea, there are a lot of potential problems with short sales.
But while they’re usually a bad idea if you won’t be filing, they almost always are bad if you will file. Why?
First, a Chapter 7 discharges the underlying mortgage debt, as well your personal obligation for your second mortgages, HELOCs, equity lines, etc.) This means that you don’t need to do a short sale to get out from under the crushing weight of an upside down mortgage.
Second, if you’re in bankruptcy, you can’t do a short sale without Court approval. This often means that you have to pay your lawyer more money to do something that has no financial benefit for you.
Finally, even though you’re in bankruptcy, the lender may still issue a 1099-C. This means that you would owe taxes on the amount of forgiven income. You would need to file a Form 982 to avoid having to pay income taxes on the forgiven debt.
Are there exceptions to this rule? Sure. If you’re a realtor and getting a commission on the short sale, it might be worth it!
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