Short Sales: Problems and Pitfalls

01 Aug Short Sales: Problems and Pitfalls

With foreclosures skyrocketing, many people are looking for ways out of their mortgages. Short sales are often used to avoid foreclosure. They do avoid foreclosure. But do they really benefit you, the homeowner?

In many cases, they benefit others, and can leave you and your credit worse off than filing for bankruptcy.

Here’s the inside scoop on Short Sales.A short sale happens when your mortgage lender agrees to release its lien on property even though it hasn’t been paid in full.

Who does a short sale benefit? You may not be the major beneficiary.

  • The lender gets most of its money without having to spend the time and go through the expense of a foreclosure.
  • The person buying your house gets a deal–a lower price then the debt on the property.
  • And, perhaps most important, short sales have been latched upon by many Realtors as a way of generating income when the housing market is in the dumps, since they earn commissions on the (lower) purchase price.

Be sure to look at who benefits from the short sale: in many cases, it’s everyone but you.

This is because, unless the lender agrees, a short sale doesn’t eliminate your obligations under the mortgage, it merely releases the lien from the property. If you do not negotiate otherwise and your state law allows it, you may remain liable for any deficiency that results from the ultimate sale of the property.

A short sale will seriously damage your credit, typically to the tune of about 200 points (the same as a foreclosure, and the same as a bankruptcy).

Finally, many lenders will issue a 1099-C for any forgiven debt resulting from the short sale. This means that the amount of forgiven debt is considered income, the same as your paycheck, on which taxes must be paid. Unless you qualify and file special forms with the IRS and state taxing authorities, you can owe taxes on this forgiven amount. The lender can also agree not to file a 1099-C as part of the negotiations over the short sale.

I have negotiated short sales for many clients over the years. There are circumstances when they are the best option. But be wary–there are many situations where they are far more beneficial for everybody else than they are for you.

I generally will not recommend that a client agree to a short sale unless all lenders agree to accept the short sale as payment in full, agree not to issue a 1099-C, and agree not to file a negative credit report as part of the transaction.

Be sure to check with an experienced lawyer who can properly advise you before doing anything.

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Brett Weiss, a senior partner at The Weiss Law Group, LLC, represents people and businesses in all phases of bankruptcy. He has experience in complex individual Chapter 7, Chapter 11, and Chapter 13 bankruptcy cases, and in Chapter 11 small business restructuring and reorganization. Mr. Weiss lectures nationally on bankruptcy issues. He has testified before the Federal Bankruptcy Rules Committee, the Consumer Financial Protection Bureau, and has twice testified before Congress on bankruptcy and credit issues. Brett Weiss is the co-author of Chapter 11 for Individual Debtors, and has written Not Dead Yet: Bankruptcy After BAPCPA, for the Maryland Bar Journal, as well as hundreds of blogs for the Bankruptcy Law Network. With his colleague, Daniel Press, he recorded a 13-hour basic bankruptcy training series, and leads intensive three-day Chapter 11 training boot camps. Mr. Weiss has received international media attention in connection with his work. He was interviewed by Barbara Walters on The View, has appeared on the Today Show, Good Morning America, ABC News with Peter Jennings, the Montel Williams Show, National Public Radio, AARP-TV, the BBC World Service, German state television, and numerous local radio and television programs, and been quoted in Money magazine, The Washington Post and The Baltimore Sun, among others. Brett Weiss is the previous Maryland State Chair for the National Association of Consumer Bankruptcy Attorneys, a founding member of the Bankruptcy Law Network, on the board of the Maryland State Bar Consumer Bankruptcy Council, and a member of the American Bankruptcy Institute and the Bankruptcy Bar Association of Maryland. He has received the Distinguished Service Award from the National Association of Consumer Bankruptcy Attorneys for his work on behalf of consumers across the country. Mr. Weiss is admitted to practice before Maryland and District of Columbia federal and state courts, the United States Courts of Appeals for the DC, Fourth and Eighth Circuits, the United States Tax Court, and the Supreme Court of the United States, and has been practicing law since 1983.
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