17 Feb Bankruptcy debtors may benefit from short selling their home
As a bankruptcy lawyer, I have often advised clients not to bother with a short sale if theyâ€™re filing bankruptcy. They are such a headache, and what is the point anyway? The bankruptcy discharge will wipe out the debtorâ€™s obligation on the house. However, Jacksonville real estate lawyer David J. Heekin, Esquire sat down with me to explain the advantages of a short sale even if a bankruptcy has been filed.
Most homeowners who may need to get out of their current home for economic reasons want to buy another home in the future. According to Heekin,Fannie Mae and Freddie Mac, the two government-sponsored entities that dominate the secondary mortgage market, have a variety of waiting periods for borrowers who have experienced â€œderogatory credit eventsâ€ such as short sale, foreclosure, and bankruptcy. Under their current guidelines (as of January 2011), the waiting period for a borrower to purchase another house after a short sale is only 2 years.
However, if someone needs to file a Chapter 7 or Chapter 13 bankruptcy anyway, he wonâ€™t owe his mortgage company anymore. So, there appears to be no incentive to short sell his home or investment property.
No so, says Heekin. “I assume your client wants to buy another house in the future, and a short sale will reduce that waiting period. The waiting period to buy again after a Chapter 7 or 11 bankruptcy is usually 2 years after the discharge, and the wait after a Chapter 13 bankruptcy is 2 years from the date of discharge. The Fannie Mae waiting period to buy again after a foreclosure can be up to 7 years. So, a borrower can purchase a home again in as little as 2 years with a combination of bankruptcy and short sale on their credit vs. a wait of 3-7 years with bankruptcy and foreclosure.”
Heekin explains that these timelines can possibly be shortened by extenuating circumstances which, according to Fannie Mae, are “nonrecurring events that are beyond the borrowerâ€™s control that result in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations.” Heekin points out that this is a vague definition and open to interpretation. “Does your client really want to argue with a lender a couple years from now about whether he meets this definition? A short sale makes extenuating circumstances irrelevant.”
If the home buyer is eligible for an FHA mortgage, how they handled their previous home makes a huge difference. The timeframe for an FHA-qualified borrower to buy again after bankruptcy and foreclosure is 3 years, but with bankruptcy and short sale, it can be as little as 1 year, depending on the type of bankruptcy filed.
One problem bankruptcy debtors encounter is the post-bankruptcy accrual of homeowner association dues. This is especially problematic for condo owners where the COA is hundreds of dollars per month. In my jurisdiction (MDFL), if my client has vacated the condo, the courts wonâ€™t typically hold them liable for post-petition COA dues, but they still get the dunning letters and phone calls. The short sale will resolve the COA and HOA issues.
“The number one post-petition debt is the condo association dues. There are also hazard insurance premiums and other maintenance expenses and/or assessments. In most cases, a short sale will help you dispose of the property much faster than if you simply wait around for your lender to foreclose, thus greatly limiting your exposure to any additional liability,” says Heekin. “In particular, I have witnessed lenders drag their feet foreclosing on owners of condominium units. In my opinion, one of the main reasons for this is that the lender does not want to begin incurring the monthly maintenance assessment.”
One other consideration supporting a short sale is privacy. Although a bankruptcy is public record, it is pretty hard to find someoneâ€™s bankruptcy filing without a certain level of expertise or pulling a credit report. By contrast, it is very easy to determine whether one has been foreclosed upon because the Final Judgment of Foreclosure is recorded in the official records of the county where the property is located.
If the homeowner can short sale the property BEFORE the lender completes the foreclosure process, he can avoid having this document being recorded. Heekin points out, “One of the easiest ways for a future employer or landlord to research information about you is to search your name in the official records. Once a document is recorded in the official records, it remains in there for all time and is easily accessible by anyone with internet access and a computer. A hundred years from now, someone will still be able to enter your name in the official records search on the Clerk of the Courtâ€™s Web site and pull up your final judgment of foreclosure.”
And there are other societal benefits to short sales. From a purely emotional standpoint, many debtors simply want to get on with their lives after having dealt with their financial problems, and for them, this includes selling their house so that they can have a sense of closure with the entire process. Since short sales usually sell for more than a bank-owned property, a short sale of the house will help stop the slide of home values in the neighborhood, which here in Florida is still a huge problem. There are people are genuinely concerned about the effect a foreclosure will have on their neighborhood and their neighborsâ€™ property values, even though they are on their way out.
- Short sales should be approached with caution because, as BLN contributor Kent Anderson points out, “A residential short sale can be a trap.”
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