If you are struggling to pay your mortgage and owe more on your house than the house is worth, you have several options. None of these options are miracle cures — they each come with pros and cons worth considering.
One of these options is a short sale. This is when a lender agrees to take less than the total amount owed on the real estate from the sale.
Facts about short sales:
- You still have to find a buyer for your house, and it needs to be a committed buyer who won’t walk away during the difficult process.
- Your lender has to approve the short sale and will require quite a bit of documentation and paperwork from you.
- The lender may not agree to a short sale. For the lender, it’s all about the bottom line, and if they think they can get more money from a foreclosure, they won’t agree to a short sale.
- The lender may or may not forgive the difference between what the house is sold for and what you owe.
- Even if the lender does forgive the amount of the loan not paid upon closing, you may be taxed on this money by the IRS.
- A short sale is a significant negative on your credit score.
- Despite its name, a short sale is not a short process and can take up to a year to complete. If you are struggling to pay other debts, a bankruptcy will make more sense for you.
- Because a short sale is such a complicated process, you are advised to work with a bankruptcy attorney who understands the complexities of cases like this and who can protect you against a deficiency judgment or other liabilities that may pertain after the sale.
What if you file for Chapter 7 bankruptcy? Should you still go through with your short sale?
In a word (okay, two words), probably not.
- Since you will be losing the house anyway, you may as well surrender the house and walk away without worrying if the lender will forgive your debt.
- You also won’t have to worry about possible tax owed if the lender forgives your debt.
- You won’t have to show your house or deal with potential buyers and the stress of hoping/wondering whether or not they will buy your house.
- On the other hand, you will still be liable for homeowner’s association fees until the bank/lender manages to foreclose on your house.
There are many things to consider when you are having difficulty maintaining payments on a real estate mortgage. The Indianapolis bankruptcy attorneys at Sawin & Shea LLC can help you find the best way out. We offer free consultations with an attorney who can bring your financial issues into focus.
How does a short sale affect my credit? Is it better than bankruptcy?
- Both short sales and bankruptcies involving foreclosures will show up as negative hits on your credit report. What is worse? It’s hard to say.
- A short sale can appear on your credit reports as “not paid as agreed.” This means that your lender didn’t receive the full amount that was agreed on when you signed your loan. The debt will show as “discharged in bankruptcy” if you file a Chapter 7 or 13.
- A Chapter 7 bankruptcy will stay on your credit report for 10 years.
- A short sale can stay on your credit report for up to 7 years.
- A foreclosure (without bankruptcy) will stay on your credit report for 7
- Filing for bankruptcy can start the process of having most of your debts discharged. This allows you to focus on paying important debts as you begin your fresh start.
- Remember that you may still owe taxes after a short sale. After it happens, you will receive a form called IRS Form 1099-C. This will show the difference between what you owed on your loan and what the house sold for (the amount the lender agreed to accept). This savings amount is taxable income. Speak to a tax advisor to understand your tax responsibility. This is not a problem for debts discharged in bankruptcy.
- Although a short sale takes a long time (because there are so many entities who have to sign off on it), personal bankruptcy can help you immediately by putting into effect the automatic stay. (An automatic stay temporarily prevents creditors, collection agencies, government entities, and others from hounding you for money that you owe.)
- A typical Chapter 7 bankruptcy takes 4-6 months, so you will feel a sense of relief far sooner than if you decided to move forward with a short sale alone.
- In a short sale, you may incur liability as a seller if the buyer discovers undisclosed defects in the house and sues you. This can, in cases where the buyer gets a judgment based upon fraud, lead to debts that are non-dischargeable in bankruptcy. If the property is in poor condition, why take this risk?
- If you have a second mortgage or any other type of lien against your real estate, the difficulty in successfully completing a short sale is significantly greater. Furthermore, there is a much greater chance of still owing on house-related debt despite the short sale.
Basically, if you are only concerned about paying your mortgage and are able to pay all of your other debts, it may be possible that a short sale is right for you as a debt relief option.
On the other hand, if you are dealing with medical debt, credit card debt, or other financial debts in addition to your delinquent mortgage payments, bankruptcy may be the most sensible solution for dealing with all of your financial problems at the same time.
Either way, you will need the expert advice and guidance of an experienced bankruptcy attorney.
At Sawin & Shea LLC, we understand that hiring an attorney to help you file bankruptcy is scary. We are committed to providing compassionate and non-judgmental representation to all of our clients. Our attorneys have helped thousands of people just like you get the fresh start they deserve. We are here to help.