Filing Bankruptcy vs. Short Sale
Franklin and Hyde Park Chapter 7 and Chapter 13 Bankruptcy Attorneys
Trying to Stop a Foreclosure
People who cannot afford to make their monthly mortgage payments are looking for ways to avoid foreclosure (mortgage company forcing an auction of the property). Some of the available options considered are selling the house and paying off the mortgage, refinancing the mortgage to a more affordable monthly payment or seeking a loan modification. However, if the house is valued at less than the balance owed on the mortgage, selling the house or refinancing the mortgage are no longer viable options.
Many individuals in such a situation are approached by a real estate broker who seeks to arrange what is referred to as a short sale. In essence, a short sale means that the mortgage company agrees to accept less than what is owed on the mortgage. There are, however, several potential problems with a short sale.
Problems with a Short Sale
First, the broker stands to make a lot of money on the sale of your house and you therefore need to be very careful that you are getting correct information, specifically that you will not in fact owe any money to the mortgage company after the sale. Also, if you have any other liens on the property (such as a second mortgage) you will still be responsible for that debt after the short sale.
Another important factor to consider is that the mortgage company will likely deem the difference between what it is owed and the amount it receives from the short sale as forgiveness of debt. For example: if you owe $300,000 on the mortgage and agree to a short sale of $200,000, the mortgage company will be forgiving a debt of $100,000. This forgiveness of debt could result in a tax liability to you.
Advantages of Filing for Bankruptcy
Rather than entering into a short sale, most often the wiser course of action is a bankruptcy filing. With a bankruptcy filing, the entire mortgage balance, and any other liens on the property, is discharged, meaning that you no longer are liable for that debt. And, as opposed to a short sale, there is no possible tax liability that may result from a bankruptcy discharge. Also, you do not need any cooperation from the mortgage company to file for bankruptcy, but you certainly do when it comes to a short sale or loan modification.
A further advantage of a bankruptcy filing over a short sale is that you can discharge other debts (credit cards, medical bills, etc.) in the bankruptcy and get real debt relief and a fresh start toward financial recovery. Finally, it is likely that you can retain the property for a much longer period of time through a bankruptcy proceeding than you would if you do a short sale.
Contact a Bankruptcy Attorney for a Free Consultation
For more information or to schedule a free initial consultation with an experienced bankruptcy lawyer, please contact Yellin & Hyman today.
Make sure that your debts are fully discharged. Call our Franklin office at 508-570-4581 or our Hyde Park office at 617-910-3664. You can also e-mail us to learn more about our legal services.