Does Short Home Sale and Bankruptcy Ever Make Sense Together?

Home foreclosures, home short sales and bankruptcies are all over the news these days. About 1 million Americans are expected to lose their homes to foreclosure in 2010, short sale inventory is consistently rising, and over 1 million Americans filed Chapter 7 bankruptcy in the year that ended on March 31, 2010.

• With both short sales and bankruptcies on the rise, it is natural to ask if attempting to do both concurrently makes sense.

The answer is: it depends, but most attorneys will probably recommend that it's not a good idea.

Short Sale

When you sell your house in a short sale, you are selling it for less than you currently owe on your mortgage, and you do not have the cash reserves to pay the difference to your mortgage lender (or lenders in the cases where you used a first and a second mortgage to purchase your home.)

• A short sale requires the approval of your mortgage lender before the contract to sell your house can be considered fully executed.
• Rules vary by lender, but many lenders will not consider a short sale unless you are one to two months behind on your payments.
• Lenders usually require a hardship letter from you stating the reasons you are having to sell short and can no longer afford to keep the home, such as you lost your job and the job you found to replace it is 200 miles away from the home that you own.
• When you conclude a short sale, you will have to file a Form 982 with your taxes the following year to try and have the amount of your forgiven debt not be a taxable event.

In a short sale, the home owner walks away from the house with nothing.

Automatic Stay in Bankruptcy

When you file bankruptcy, your creditors, including your mortgage lender has to temporarily stop any proceedings against you while your bankruptcy is being discharged.

• If market conditions are such that there is no equity in your home, the bankruptcy court is not going to be able to use your house as an asset they can sell to help pay your creditors.
• If you cannot afford to keep your home (or have had to move away as in the above example) and you will not be attempting a loan modification or a reaffirmation of your mortgage loan, it may be better to let the house show up as a "$0.00 balance bankruptcy discharge" on your credit report, rather than as a short sale.
• You cannot negotiate with your lender or conclude a short sale while you are in bankruptcy without the approval of the bankruptcy court.

Get Legal Help

Short sales and bankruptcies are serious financial decisions that can have an impact on your credit score and your life for years to come. Talk with an experienced attorney who, understanding your personal situation can advise you if it makes sense or not in your case to short sale your home or file bankruptcy, or both.