Can Short Sale of a Home Prevent Bankruptcy?

If you are facing foreclosure because you are in default on your mortgage, but your other unsecured debt is under control, then you may want to sell your home with a short sale. You can save your home from foreclosure and avoid bankruptcy by using the short sale option.  A short sale home is when you sell your home for less than you owe on your mortgage with your lender’s permission.  When negotiating a short sale with your lender, it is important to make sure you get something in writing stating that the short sale proceeds satisfy your loan balance. Otherwise, your lender may be able to come after you later for a deficiency judgment, which is the difference between the sale proceeds and what you owe them on your mortgage.   Not every state allows deficiency judgments.   

Bankruptcy Last Resort 

If you have substantial debts other than your mortgage debt, such as high unsecured credit card debt or medical bills and you cannot afford to pay those bills, then you may need to talk to a bankruptcy attorney.  Selling a short sale home would not get you out of your other debt because there would not be any excess proceeds that you could use to pay off your unsecured debt.  The lender gets all the proceeds in a short sale and has to write off rest of the loan balance.  It is best to speak with a bankruptcy attorney before you decide to sell your home to find out the best options for your financial situation.  Bankruptcy is always used as a last resort to prevent foreclosure and to solve debt problems.  Your lender cannot collect a deficiency judgment if you file bankruptcy.  

Debt Settlement 

You may be able to use debt settlement as an option to reduce your unsecured debt and avoid filing bankruptcy.  A debt settlement is when you negotiate a lump sum reduced payment with your creditors.  It is less serious than having to file bankruptcy and less harmful to your credit, especially if you negotiate with your creditors that they will report the debt as paid in full or paid as agreed on your credit report.  A Chapter 7 bankruptcy stays on your credit for 10 years.  A Chapter 11 or 13 bankruptcy stays on your credit 7 years if you complete the court-approved payment plan, and 10 years if you don't.   

Secured debt is not included in debt settlement.  However, you can negotiate a short sale, mortgage modification or other foreclosure prevent option separately with your lender and prevent foreclosure and save your credit as well.  A short sale stays on your credit 7 years, but if you negotiate with your lender that they report the sale as paid as agreed or satisfied, then it won’t harm your credit.    

Speak with an Attorney 

Facing foreclosure and bankruptcy are both serious issues.  You should consult with a bankruptcy/foreclosure defense attorney to discuss your options such as short sale and/or debt settlement.  The attorney can negotiate a resolution with your creditors, and represent you in court.