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Short Sale a Home in Bankruptcy

These days many homeowners find that their home is worth less than the amount of their mortgage. A tragedy yes, but this is largely due to the fact the most homes lost their economic value due to the 2008 recession.

Because the homeowner’s judgments and liens are worth more than the value of the house, the seller can’t give clear title to a buyer because the seller will still owe money after the house is sold.

Many sellers think their only option, if they can’t afford to pay the monthly mortgage and monthly debts, is to let the home be foreclosed on be creditors or to file a federal bankruptcy.

There is another alternative called a short sale. A short sale is a legal method that lets the seller give clear title even though the value of the home is “short” of what’s due.

To achieve this alternative, all the lien-holders, mortgage holders, homeowner associations and anyone with a claim against the home need to agree that the sale can proceed.

Lenders normally require that the debtor/homeowner show some proof of hardship. Examples of hardship include loss of job, medical difficulties or family problems. If just one lender doesn’t agree, then the short sale can’t proceed.

After the sale of the home, the creditors can still claim a deficiency judgment. The short sale doesn’t get rid of the debt. It just allows the sale of the home to proceed.

Why should a homeowner consider a short sale

The main reason to consider a short sale is to minimize the amount of the deficiency judgments – the amount you will still owe the creditors after the sale goes through. With a short sale, you have the chance to get a better sales price than if the house goes through a foreclosure or a bankruptcy sale.

With a short sale, the house also gets sold quicker than a foreclosure or bankruptcy. Quicker sales mean lower interest rates and lower fees.

Additional further reasons to consider a short sale are as follows:

  • The creditors might forgive the balance of the loan if they know they’re getting the bulk of their loan through the home sale and that you don’t have other assets.
  • Your willingness to cooperate with the creditors may help your credit score.
  • A short sale looks better than a foreclosure or bankruptcy.

Why should a homeowner avoid a short sale?

There are disadvantages to a short sale. The debtor/homeowner does need to arrange to find a buyer. It may be difficult to get a broker so the homeowner may have to try to sell the home on his or her own.

There is a lot of paperwork involved with a short sale that the debtor has to know how to complete or has to pay a lawyer to complete. The creditors can still get a deficiency judgment for the balance due which may force the debtor into bankruptcy anyway.

There can also be tax consequences if creditors forgive the debt. Your credit will still be negatively affected.

Keeping the home alternatives

A Chapter 13 bankruptcy option may let you keep the house provide you get keep up the regular payments plus pay the arrears over time. There may be the possibility of stripping some of the house related debts that are worthless in a Chapter 13 bankruptcy.

Why you should see a lawyer

An experienced debtor’s rights attorney will properly review your financial situation and explain all of your options. There are a wide range of legal, financial and practical options debtors need to consider before they act. Some of these options can help a debtor keep a home or minimize their losses. Other options, at least, let the debtor get a clean fresh start. Most of the options require that a lot of formalities be met that only a knowledgeable lawyer will know.

Delay can reduce your options so it’s best to consult with a skilled debtor’s rights lawyers as soon as you can.