Bankruptcy Attorneys vs Short Sales; To Short or not to Short
81Why short sales make sense even if you have to file a bankruptcy
A band-aid on the titanic
As a foreclosure advocate, I get this question a lot. Often its because the person has received some advice from an attorney, or a friend that they trust. They are essentially assuming that a bankruptcy is as bad if not worse than a foreclosure so if your credit cant get worse, whats the point. Its like being a little bit pregnant.
This advice is very typical of most bankruptcy attorneys I've worked with in the last 10 years. In fact I was doing a little looking around the Internet for other people's thoughts on this and found a video on you-tube where an attorney is taking the position that short sales are 'trouble' (shocker) and its not really worth worrying about.
Oddly he claims there are two kinds of short sales, one where you get stuck with the debt anyways, and one where you don't. This is a pretty strange analysis, as there is only one kind of short sale; The kind where the bank doesn't get all their money.
If you are a homeowner faced with this question the quick and dirty version is there are 3 different results that can come from doing a short sale. I talk about them in this article, however, this article isn't intended to address these 3 results, this article is about people in bankruptcy so the 3 results don't apply, but, I do intend to write an article that addresses this problem for anyone not doing a bankruptcy in conjunction with a short sale.
Now the reason attorneys think this way is because...well, they are attorneys. They are taught to think this way. Their job is to help people stay out of trouble, and short sales are a bit complicated and require professional help. I often equate it to open heart surgery...ok its not that tough, but it is something that should only be trusted to experts with verifiable experience.
Also some attorneys try to avoid as much work as possible, and since they would have to file a couple of extra documents to help their client do a short sale, well its just easier to discourage it (I'm sure I'm going to catch hell for that comment O.O) I'm totally kidding all you attorneys reading this...kind of.
The second reason attorneys think this way is because attorneys don't care about your future credit. Well, let me rephrase that...they don't have any incentive to care; I don't mean to imply they are heartless, and some Attorneys might actually care about your credit. But if someone has just helped you destroy your credit by filing a bankruptcy, in their mind doing a short sale after or during a bankruptcy is a bit like tagging a band-aid on the titanic. Too little too late as they say.
They also are typically only looking at it from a legal perspective, meaning because of the bankruptcy you are no longer responsible for the debt, so they are correct that its a bit pointless to do a short sale if all you are worried about is owing any deficiency.
This however is a short sighted mindset, as it only takes into account the present at the expense of your future. They are essentially saying that it doesn't matter because the mortgage company cant try to collect the debt. But the most relevant question you should ask yourself is, do you want to buy a home some time in the future? If so, this decision is more important to consider than most bankruptcy Attorneys, and their clients might think.
When facing financial hardship, you can save yourself valuable time and avoid stress if you begin looking immediately at how to rebuild your credit and financial health. Don't wait for the aftermath, or worse, waiting years later to begin planning your path back to good credit and home ownership.
Doing a short sale, even if you are in a bankruptcy is a huge step in the right direction if you plan to rebuild your credit and own a home again some day. At the very least it will keep your wait under current mortgage guidelines to 24 months as opposed to 5-7 years.
Its all in your perspective
I called a friend today who happens to be a bankruptcy attorney, and I asked him this question. "Can you tell me one reason that its better for someone to not do a short sale if they are going to file a bankruptcy?" he gave me two answers, and they are very telling.
His first answer was "sure, there are several reasons". He went on to explain that sometimes people are at an emotional point where they just cant handle any more stress and just want a clean start.
This might seem fair enough, however, In my opinion, this really only answers issues of mental and emotional well being rather than the more technical question of how it affects you and your credit in the future.
I mean, If you are on the verge of a mental breakdown, then just do what you need to do in order to feel well. I get that, really I do. It is after all just a house, but lets throw out those individuals and look at people who aren't dangerously close to the edge of losing it;
So I said "Ok, but what about everyone else?"
His answer was "yeah, I cant see any logical reason not to do a short sale even if you are already in a bankruptcy."
Now, I am not calling this the end all be all of opinions, nor is this legal advice. *You should legal advice from an attorney who specializes in bankruptcy and foreclosure matters (even though he is probably going to tell you that there is no reason to do it, but you will know better after having read my article)
So let me recap what he is saying in plain English for people like you and me. Sometimes its a mess and people are filing a bankruptcy to move on with their life. They want the mess behind them. They want the proverbial 'clean slate'.
BUT if you factor in the long term goals of most people, like owning a home, it makes sense to do everything you can to ensure you have a clean credit file. Short sales look better on your credit in the long run, but sometimes people just cant deal with more stress, thats just how it is and they will simply deal with the resulting consequences later when they are in a better state of mind.
It should be noted here, because I'm sure some guy that's been doing short sales, or mortgages or selling Hyundai's for a tenth of the time I have...(I've never sold Hyundai's, just the other stuff) will make some comment about how despite my opinions short sales are still a negative item on your credit.
He would be correct, its just like settling a credit card for less than you owe, it will most likely report on your credit that you did not fully pay the debt. Sometimes we are successful at getting the lender to report it as paid in full, but you shouldn't rely on that as any kind of a certainty...if it happens its a nice bonus, but don't plan on it. So it is BAD, but it IS NOT as bad as a foreclosure nor is it as bad for as long as a foreclosure.
By law, foreclosure stays on your credit for 7 years. Bankruptcy also remains 7 to 10 years depending on what chapter you file under. The major CRA's or Credit Reporting Agencies such as Trans-union, Experian and Equifax do not release to the public how they calculate credit scores, however there are ways out there to simulate how events like bankruptcy and foreclosure factor in to your score, and typically a settled account such as a short sale or a credit card settlement, will affect your credit score negatively for 12 months. After that first year these simulators suggest that the negative impact begins to greatly diminish.
What we do know for sure is that the time to get a mortgage after a short sale is less than it is after a foreclosure. So often the argument about how it affects your credit score is a pointless issue because the majority of people are more concerned with the question of when they can own a home again. Because of this the waiting periods to get a mortgage after a short sale that are imposed by the mortgage industry are really the most important relevant issues to any homeowner.
Where do we go from here
Now that we understand the perspective that attorneys have, and why they often recommend not doing a short sale, lets look at how we can determine for ourselves if a short sale is the right choice.
The way to determine if you should do a short sale while in bankruptcy is to ask yourself this one simple question; Even though my credit is going to be damaged now, do I want to own a home again sometime in the future?
If the answer is yes, then you should seriously consider the idea of doing a short sale regardless of a bankruptcy filing.
As a mortgage professional, I feel there are several good reasons that you should consider a short sale over letting it go to foreclosure. For instance most lenders require 24 months from a foreclosure before you can get a mortgage.
*UPDATE*
[As of 2008, Fannie Mae and Freddie Mac are now indicating that they will have new guidelines for those who have had a foreclosure or a short sale. The statement says:
Fannie Mae
- will now prohibit foreclosed borrowers from getting another mortgage through the giant investor for five years
- If there are "documented extenuating circumstances." the mortgage prohibition is for three years.
- After five years, borrowers with foreclosures in their files will have to put at least 10 percent down and need minimum FICO credit scores of 680.
Freddie Mac
- will now prohibit foreclosed borrowers from getting another mortgage for seven years
- The company also claims they will "aggressively pursue walkaways to preserve our deficiency rights" where permitted by state law.
While they have not indicated yet what the rules will be for a short sale, in the past they have been as much as half the waiting period for a foreclosure. Previous guidelines called for a 1 year waiting period before a mortgage could be obtained after a short sale.
It is important to remember that there are two aspects of your credit to consider when determining whether or not to go through with a short sale. These two aspects are the FICO score impact and underwriting guidelines and how they will affect your ability to get a mortgage.
Two for the price of one
Despite the fact that the FDCPA or Fair Debt Collections Practices Act requires that all debts included in a bankruptcy be reported on your credit report as "included in bankruptcy", there is a second place that a foreclosure shows up on your credit report; Public Records.
So you have the mortgage company reporting on their line that the loan was foreclosed, and then you have the foreclosure itself showing up in the public records. This will remain on a credit report for 10 years.
Knowing what has happened in the mortgage and banking world starting in 2007 through the present, its likely that lending criteria will continue to become more strict as banks look to avoid repeating the mistakes of the past 6-7 years. Because of the tightening of credit and increasingly strict lending standards its more important than ever that people consider the implications of their choices as they go through financial difficulties such as bankruptcy and foreclosure.
If you are facing foreclosure or bankruptcy you can contact me via my website Utah Mortgage Team. I offer my time and experience as a completely free resource to answer any questions you might have about your rights and options during this difficult time. We only do mortgages, and we don't sell anything or ask for money, we just want to give everyone really good information so you can make the right decisions for your family. We are located in Utah and have been helping homeowners stop foreclosure for over 10 years.
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This depends on if you are talking about a chapter 7 or chapter 13. My understanding is, that if you have been discharged from the debt via bankruptcy then you cannot be 1099'd for that debt. The short sale isn't the operative question its whether or not you can be 1099'd for debt that has been discharged in a chapter 7 bankruptcy.
This is one of the major reasons that my professional opinion is, if you are in a BK it is always in your best interest to attempt to get a short sale done thereby avoiding both a BK and a FC on your credit. Some Attorneys erroneously believe and tell others that it doesn't matter, but it does from an underwriting/credit standpoint. From a legal standpoint it does not matter, so even though they are experts on law, rarely are Attorneys experts in the fields of credit and mortgages.
Now, here is the real kicker. Lets pretend for a second that you might get a 1099 if you do a short sale while in a BK. In order to fill out IRS form 982, which essentially says "I'm bankrupt" you have to be insolvent. The definition of insolvent, is when your debts total more than your assets...generally speaking every bankruptcy client qualifies under this definition. If you are bankrupt you are insolvent, if you are insolvent you fill out an IRS form 982 and you don't owe income tax on the canceled debt. That's your backup plan for if you somehow were given a 1099 even though they cannot give you one for debt you have been legally discharged from.
What happens if you do have an offer on your short sale and your in the process of the Bankruptcy? Do they still pursue with the short sale or the lender needs to request for the BK Lawyer for the release? We have an offer for our property right now but we are in the middle of the BK process..
Its actually really simple to proceed even while you are in a bankruptcy. The only thing that needs to happen is your attorney needs to submit a request to the Judge in the case requesting permission to sell an asset of the estate.
Typically in chapter 7 cases, if it is a short sale situation the trustee (different than the Judge) will either have already abandoned his interest in the property or will not have much issue with doing so.
Also, if your realtor knows what they are doing with the short sale you can put as much as $1500 on the Settlement statements under Attorney Fee's which can be used as an incentive to motivate an Attorney to get the necessary documents filed if need be.
Let me know if this helps or if I can be of further assistance!
Its actually really simple to proceed even while you are in a bankruptcy. The only thing that needs to happen is your attorney needs to submit a request to the Judge in the case requesting permission to sell an asset of the estate.
Typically in chapter 7 cases, if it is a short sale situation the trustee (different than the Judge) will either have already abandoned his interest in the property or will not have much issue with doing so.
Also, if your realtor knows what they are doing with the short sale you can put as much as $1500 on the Settlement statements under Attorney Fee's which can be used as an incentive to motivate an Attorney to get the necessary documents filed if need be.
Let me know if this helps or if I can be of further assistance!
Hi,Hope you are doing great. My business owes about 250K on credit card debt & line of credit. We bought a house for 600K which is now worth <400K. Its pissing us off to keep paying mortgage for a home which will not be worth it for many years, at least. We are barely making minimum payments but we are not behind at all. Can we:1) do some kind of debt consolidation/reduction?2) do a short sale or so (and may still live in the same house, somehow? I heard of some people who did it!!!)3) do the above without disrupting the credit as much as possible
Thx.
Thank you! I hope this finds you well also. Its frustrating to have purchased at the peak and to see your value now under water. If you are as you say barely making minimums, is this an interest only or adjustable loan?
Its possible with the plan that Congress just passed that your loan could end up getting picked up through this program. It is also possible that once picked up there could be a program made to rework your interest and or principle. The problem facing everyone is no one knows how this will shape up. Details are slow coming forth and its impossible to see what specifics will be put into place.
Shorting the home and somehow remaining in it, is what is often referred to as a 'Sale lease-back'. There are a number of reasons why I warn people against doing them, but they often fall on deaf ears because humans have a tendency to overlook risk when its in correlation to something they want really bad.
The bottom line is, it can be done if you find someone who can finance it and or put up the cash. If you talk to a family member or friend just know that you will have to sign a disclosure from your mortgage company stating that this is an arms length transaction. Acknowleding that it is indeed arms length, when its not does constitute fraud. If you happen to find someone who is willing to do an arms lenght transaction, it will cost you. They will be looking to buy it as cheaply as possible on a short sale, and will be looking to give you an option in the future that makes them a substantial amount of money for the risk they are taking.
Doing any of these things without disrupting your credit is like asking to have your appendix removed without having to get cut open. There will be damage to your credit if you do anything other than sell the home for what you owe, or continue paying until the market rebounds above what you owe. Short sales are not good for your credit, and although they are not as bad as a BK or Foreclosure, they are also not a minimal impact type of reporting item either.
This is a tough situation for sure, and its not an easy one to guide you in simply because if you can make the payments its going to be difficult to explain to the mortgage company why they should take a short sale when you can afford to make the payment. Of course I am not advocating that you lie or fabricate an explanation. On the other hand if you are infact insolvent it may be time to speak with an Attorney and see what your options are.
Hi, Thanks for this post - it's been very helpful! I was a straw buyer in a mortgage scam with some trusted friends and now I am facing bankruptcy. They used my credit to buy 2 homes. One short sold 6 months ago, but the second mortgage "charged off" the debt, so I am still being held responsible for paying back $45K. The second home is in the process of a short sale. There is a very serious buyer and the house is under contract. We are trying to get the second mortgage on this home to accept the short sale as "paid in full without recourse, or settled in full without deficiency," but they may or may not agree to those terms. My guess is that they will probably charge off the debt and send it to a collector. That second mortgage is $140,000. I can't afford to pay any of this, so I am looking seriously at filing a chapter 7 bankruptcy. The attorney that I met with said I need to wait until the bankruptcy is filed before I go through with the short sale, or I won't qualifiy for a bk. But I make under $50k per year. He said the debt is considered business debt because it was an investment. Is this true? Do I really have to put off the closing until my bankruptcy is filed? He said it would delay the closing at least 2 months. if I file bankruptcy, will all the debt from the 1st and 2nd mortgages from both houses be discharged, meaning I won't be required to pay it back and the collectors will stop calling? Also, if I get a 1099 from any of these mortgage companies, either for the debt that was "charged off" or the difference between the original loan amount and the price that the homes short sold for, will I have to pay taxes on that? I am also really worried about one more really big thing. Losing the house I currently live in. Its a town home but I'm pretty sure it has more than $20K in equity. And last, if I want to get into another home, do you estimate that it will take at least 4 years for me to rebuild a good credit history? I had a score of 780 before all this happened. I have 38 accounts in good standing on my report, and 4 negative items - the 4 mortgages for the two investment homes. Plus I will have a bk. Sorry for all the questions, but this is a huge mess and I'm trying to sort through it and make the best decision. Thanks for your help!
Ok, one question at a time:
I dont agree with your attorney that it is a business debt. Im guessing that you signed personally on the mortgages as either 2nd homes or investment properties. Unless you are filing a chapter 11 on a business entity, I'm pretty sure that those mortgages are personal debt.
Without going over your budget though, I wouldnt be able to speak to why he perceives that you will no longer qualify under a chapter 7 if you short first.
Having said that, I almost always feel that its worth it to look at a short sale even if you go through a BK. If you successfuly are discharged, you will have no liability for any phantom income. The terms of IRS form 983 plainly state that those who are insolvent are released of the liability. Bankruptcy and Insolvency mean the same thing.
On the personal residence, you need to ask your attorney about your states homestead exemption.
Finally, rebuilding your credit scores can be rather fast. In as little as 6-12 months after all this is over. We have a client who was discharged in March and in June has scores in the 700's. What will take time however is the new Fannie/Freddie guidelines regarding having a foreclosure or a BK before getting a new mortgage.
Thanks for all of the info!
My question is dealing with the 1099. I own an investment property that I am currently trying to short sell ( it is 45 days out from being foreclosed on). Is there anyway to avoid the 1099 tax obligation without filing bankruptcy? With the current value of my home vs my mortgage debt, I will probably end up owing in the neighborhood of 50k-75k in taxes even if I can find a buyer. I have recently lost the majority of my income so I could fall under the Chapter 7 bankruptcy and I have no real assets. I also own another home as a primary that is under water by 50k and it has 2 yrs left on the arm. I was thinking about short selling both and filing chapter 7 to avoid any tax obligation. I am open to any of your thoughts.
Thanks in advance.
What you are looking for is called IRS Form 982. This form allows for someone who has recieved phantom income or a 1099 for a forgiveness of debt to inform the IRS that they are insolvent. By virtue of such declaration the person is not obligated to pay income tax on the forgiven debt.
My understanding is that the requirement for filing an IRS form 982 is that you must be insolvent. If you qualify for a chapter 7, then you most definitely fit the definition of that word. I would say that if you need a chapter 7, then I would get a consultation now otherwise cross the bridge when you get to it. Read the IRS website on the Form 982 and I think with that clarity you will be able to move forward and know exactly what you need to do.
We are preparing to file ch 7 Bk and our attorney advised us to let the house go as well. Now learning that foreclosure is more impactful than bk for future home buying opportunities, we are going to seriously look at a short sale. My question has to do with timing. We are borderline to pass the bk median test and will have to file no later than Jan in order to qualify. I was under the impression that you can't process a short sale while in the middle of a bk, but you seem to indicate otherwise. Can we start the short sale process asap and file for bk while still in the ss process? Or do we need to hold off on filing the bk until the ss is complete?
P.S. Thank you so much for any insights you can give!
Christie,
You are experiencing the exact scenario that prompted me to write the article. It is the norm for Attorneys to give this advice. The reason is first they arent experts in finance, so they dont necessarily see the need to do it since you will be causing substantial harm to your credit score. But what they miss is that scores are not the entire equation with lending and underwritting. Since Lenders have guidelines that make you wait longer for a foreclosure than a BK, then it makes sense to avoid a foreclosure even if you are filing a BK.
You can definitely start the process while in the BK, or you can start before. I would find someone very experienced who has done hundreds of short sales and has a very experienced team. If possible find someone who ONLY does short sales. I would interview multiple short sale specialists. Listen closely to them and their approach. You need someone who is looking out for your best interests rather than someone who is looking at each potential deal as an investment opportunity for themselves. In fact, on this note I would recommend you read my other hub about always using an agent for a short sale. It talks about what you are looking for and why.
Where you could run into resistance is with your Attorney. He may try to convince you that I am wrong. Unfortunately for him...I'm not. It does cause him a bit more work, but what I tell them is that there are ways to get them compensated from the short sale legally and since the bank pays and not the seller, amazingly they all of a sudden seem so open to the idea. Weird right? =)
The attorney has a couple of extra steps that they need to take to help you do this. First they will need to request permission from the court and ask the trustee to abandon their interest in the property. Once an offer is submitted, and preferably approved by the bank he will have to go back to the Judge and Trustee and ask them to approve the final numbers so that an asset of the estate can be sold.
It really isnt that much more work, but it is a little bit more so just remember its all in the presentation like anything. If you sell it right and explain the benefits to you and them if necessary they should see your reasoning.
Hope this helps. If you have any other questions feel free to keep posting.
Wow, thank you for such a quick and clear response! You mentioned that there are ways for our bk attorney to be compensated from the short sale. Is this something that a knowledgeable real estate agent should know, or can you expand on the details a little here? Also, do you know any good agents in the Colorado Springs area? Thanks!
My husband has been relocated and because of the housing market we will not be able to get out of it what we owe. We are up to date on all of our debts and very concerned about how this will affect our credit and if we will be able to purchase a new home. Our lender is not at all helpful. Is there any way to get the lender to not report it as negative on our report? I feel like we are being punished for the market being so terrible and us being up to date on our debts. What is our best option?
what should one expect to pay an attorney handling a '500k short sale by owner' ?
Bankruptcy Attornies vs Short Sales To Short or not to Short
Great post.
Question - We filed BK 7 in April 2008 - our mortgage was included in the BK, the home loans (1st & 2nd) are reporting on CRs as "IIB" - Okay so we are no longer responsible for these debts. We have continued to pay our payments every month for a year - but we now must move due to job relocation. We are upside down approx. $150,000 - we want to buy a home again as soon as possible - what happens if we short sale? Is it even an option for us? Say it sold for $180,000 - we give all that money to the lender, are we free and clear since debt was discharged? If we let it go into foreclosure, won't that report somewhere and effect when we can buy another home, more so than the bk ?? ... help.
Christie says:5 months ago
Wow, thank you for such a quick and clear response! You mentioned that there are ways for our bk attorney to be compensated from the short sale. Is this something that a knowledgeable real estate agent should know, or can you expand on the details a little here? Also, do you know any good agents in the Colorado Springs area? Thanks!
From Corey:
No most agents are not informed about this...unfortunately. Also, I am sorry but I am also not familiar with that local market so I wouldnt feel comfortable giving you a reference. However, you could look up William Bronchick. He is extremely knowledgable in this area and if he couldnt help you directly probably knows who you ought to talk to.
Tammy says:2 months ago
My husband has been relocated and because of the housing market we will not be able to get out of it what we owe. We are up to date on all of our debts and very concerned about how this will affect our credit and if we will be able to purchase a new home. Our lender is not at all helpful. Is there any way to get the lender to not report it as negative on our report? I feel like we are being punished for the market being so terrible and us being up to date on our debts. What is our best option?
From Corey:
I would suggest looking at a short sale. Since the information will be accurate there is not a way to avoid a negative report on your credit, however there are ways to minimize the damage in how they report it. In other words if they report it as satisfied or settled for less than agreed. i wouldn't let that prevent you from looking at a short sale though. The alternative is worse.
Alisa says:6 weeks ago
what should one expect to pay an attorney handling a '500k short sale by owner' ?
From Corey:
Nothing. Banks pay the fee's by including it as part of the payoff.
sophieqd says:2 days ago
Bankruptcy Attornies vs Short Sales To Short or not to Short
Great post.
From Corey:
Thanks!!!
Bella says:24 hours ago
Question - We filed BK 7 in April 2008 - our mortgage was included in the BK, the home loans (1st & 2nd) are reporting on CRs as "IIB" - Okay so we are no longer responsible for these debts. We have continued to pay our payments every month for a year - but we now must move due to job relocation. We are upside down approx. $150,000 - we want to buy a home again as soon as possible - what happens if we short sale? Is it even an option for us? Say it sold for $180,000 - we give all that money to the lender, are we free and clear since debt was discharged? If we let it go into foreclosure, won't that report somewhere and effect when we can buy another home, more so than the bk ?? ... help.
From Corey:
You are exactly correct. You are not responsible unless you reaffirmed. If you did not, then you are not responsible to pay that debt. Moreover if you simply walk away now, even though you were discharged of the debt, you will also get a foreclosure against your credit. It will report as "Foreclosure-Included in Bankruptcy" but it will be a foreclosure nevertheless and will keep you from getting a conventional loan for 5 to 7 years through Fannie Mae and Freddie Mac respectively, and 3 years through FHA.
The BK also has the same 3 year waiting period for FHA, however your discharge date was last year, so you already have one year behind you, whereas your foreclosure date would be in the future and would begin the 3 year countdown from the date of the trustee sale.
Hope this helps clarify.
Corey
This page is, without a doubt, the most informative article I've found today in hours and hours of internet research on this topic... thank-you! That said... my husband and I entered into a sub-prime mortgage for our current home in March 2007. In a rare scenario, our sub-prime status stemmed more from self-employment for less than 2 years at the time than it had to do with our then-mediocre credit rating. Less than a year later, we defaulted on payments due to an unexpected and costly custody battle. While we were successful in our family-court battle, we were being served with papers beginning of the foreclosure process on our home. By approx. In March 2008, we were approved for a 9-month loan modification plan by the Servicing company handling our loan. While our payments were nearly doubled, we then defaulted on THAT agreement about 5 months later due to more unexpected legal (family-court) expenses. Our taxes had also not yet been paid, and the lender kindly paid them... with the catch being that our past taxes as well as future taxes (in Escrow) are now added to our payment. Making what WAS an $810 mortgage a now $1385 mortgage! Furthermore, we were reminded that the mortgage is scheduled to "reset" in March 2010. THAT is terrifying!
With our credit at rock-bottom, we consulted with a Bankruptcy attorney. We started the Chapter 13 process, but hesitated many times along the way and never signed the actual petition after the attorney's office prepared it because it just didn't "feel right". Having been served again approximately a month ago with an "Intent to Foreclose" notice by the servicing company (lender's middle-man), we signed the Bankruptcy petition. Since so much time had passed, the paralegal informed us that a new petition is now being prepared and we can expect to file on 5/1/09 at this point. We have informed the lender as such.
Today, we received an offer from a reputable investor willing to buy our property via short-sale. He is confident in his ability to work with the lending company for a short-sale approval, and spent an hour on the phone discussing our financial situation. I proposed the idea to my husband, who is concerned because - even with a short-sale - we have so much miscellaneous debt at this point (car payments, etc...) that we really NEED to file the bankruptcy anyway in the near future, if not right away. My husband and I have little emotional attachment to our home, since we haven't been able to afford the cosmetic upgrades we were hoping to achieve by now anyway, and we have become less and less fond of the neighborhood we're living in. However, the tricky part of this for us is the fact that we have 5 children and a dog. Knowing that we will not be financed for a home again in the near future, finding a landlord willing to allow 5 children, a large dog, self-employment, little-to-no $ down on the rental fees, etc... seems a nearly impossible task. Rental homes in our area are hard to come by, and we need to stay local for legal reasons in regard to our children and custody/visitation agreements.
Having done a lot of internet research today and after an hour-long conversation with this Investor, we really do understand that Foreclosure is the worst-case scenario. We also really "get it" that we could choose to so-called "keep the house" w/the Ch 13 solution... and still not be able to afford the reset amount next year... and STILL end up in foreclosure. Particularly when you add an (appr.) $1200 bankruptcy payment to the Trustee every month once we file bankruptcy.
So at this point, we feel like we're standing in the middle of a room that's spinning around us. We are custodial parents to 5 children aged from pre-school to high-school that we are solely responsible for (in terms of well-being), we are running two businesses of our own - one of which is taking a pretty good hit from the current economic crisis (although still making money), we cannot lose our cars to repossession because our businesses and our family depends on them (thus making the bankruptcy a necessity even with a short-sale on the home), we can't imagine where we'd move to if we can't/don't stay in our current home, and we're afraid that if we turn away from the short-sale opportunity and hold our breaths with the bankruptcy... knowing a reset in mortgage payments is less than a year away and we could ultimately "lose it all" anyway... we will have thrown a LOT of money away trying to hold on to something that has created nothing but hardship from the beginning.
I'm not even sure what specific questions I'm asking here... except to say that we are SOOoooo confused as to what to do/where to go from here regarding the bankruptcy, the short-sale prospect, the impending reset of the sub-prime mortgage, the foreclosure intent although the lender has respected that we've retained an attorney (even though we haven't actually filed bankruptcy yet)...
Any/all advice is welcome and soooooo greatly appreciated!
(and sorry for the length of this post, it's a complicated situation)
Tajelina,
Thank you so much for your kind words! I really appreciate what you said. I also appreciate you sharing your experience with everyone. All of these comments add richness to my post as they are the 'real world' examples of what I do.
To your question about doing a short sale, could I recommend that you read my other hub about doing a short sale with an agent? I really really discourage anyone from using investors to do short sales. I am an investor, and I am not an agent. So you could say that by telling people that I am shooting myself in the foot, but its the truth. It is not in your best interests as the homeowner.
The easiest way to explain why is this. An investor wants to buy it themselves. They often tout the fact that "they are the buyer" as an added benefit to you. But what they don't tell you is what happens if the bank wont come down low enough to make it a deal that they will buy. What happens if the bank only comes down enough to make it an ok deal. A deal that any person looking to live in the area would jump at, but an investor would pass on because there wasnt enough profit in the deal to put their money at risk.The way I do all my short sales is I turn my clients over to an agent who is an expert in doing them. That is the ONLY thing they do in fact. They negotiate with the bank, and when they get a number I get to have first shot. But if the bank isn't willing to come down enough, we make sure that the property is being marketed to the entire open market. You cant afford to miss out on a buyer just because some investor wants to see if the bank will come down low enough to make it a 'steal'.
Its ok to be a short sale investor, but it is NOT ok to leave your client with only one option. Using an investor gives you one shot at completing the short sale and avoiding foreclosure. He may well be 'confident' but that is no where near as confident as I would be knowing that everyone on the open market is going to have a chance to submit their offer too.
If this investor doesnt know how to do what I just described and still get first shot at it, then you know that he hasnt been doing this very long.
DO yourself a favor and do some research on your local area and see if you can identify a couple of short sale experts that are licensed agents. At least interview them in addition to this investor.
Hello, I am so happy I found this article! Thanks for writing it and for posting all the questions and answers. My situation is exactly like the one Christie wrote 8 mo ago.
My BK attorney is going to file our paperwork with the BK court; hopefully by the end of August. We do quailify for Chapter 7; but I am unsure as to what should go through first. Before we finished all our paperwork for bankruptcy, we decided to short sale our property with and agent. We have one offer on the house but the bank has not accepted the price yet. My husband and I are in serious debt and we really need to get our bankruptcy filed because we are being sued by some creditor. My question is we told our BK attorney we wanted to let the house go, but we have not told him we are in the process of waiting for the bank to approve our short sale. I am very confused as to what am I suppose to do first. I am not trying to hide the short sale from the BK attorney. I just not sure if he needs to know. The most important thing is to be cleared of all our debt, but we would also like to buy a home later in the future. We have four kids all under the age of 8 and only my husbank works. My question is does my BK attorney need to know about the short sale? If so, why. What happens if the short sale is not approved by the bank? Can we still let the house go? Any advice you can give is greatly appreciated.
Thanks
I apologize for the delay in answering you. There was a change in my email, and unfortunately the notification kind of fell through the cracks. I hope that this gets to you in a timely fashion.
First I would say yes absolutely your Attorney needs to know about the short sale effort. The reason is because he can help. As the foreclosure sale approaches, the bankruptcy can buy you valuable time. One other benefit that often comes of a BK filing, is that the file gets transferred from the Loss Mitigation department to the Bankruptcy Department. I dont have any hard statistical evidence, but my experience has been that the specialists in this department are typically better educated on the options available and they seem to be more helpful in facilitating the short sale. Your results may vary, but I feel comfortable in putting it out there because it has been true for me the majority of the time.
Remember that this article is helping people understand why they still should try to do a short sale even if they are filing a BK. Having said that, I do understand that not every short sale will get done either because of the bank or because of the lack of a qualified buyer. Because of this, i have included the necessary information regarding qualifying for a new mortgage in the future. If you end up not being able to complete a short sale, you can of course still include the debt in your BK. In fact you have no choice but to do so (other than to reaffirm).
Doing a Short Sale and a BK together is really the best of both worlds (considering your circumstances) since you can both avoid a foreclosure and completely avoid any possibility of a deficiency.
I hope this helps....good luck!
Corey
While all of this is very helpful to a lot of people I think there is one thing that has not been addressed. We have been attempting a short sale for severla months now and were very close to finalizing a deal. Until......the junior lender has said they will puruse their rights for a deficiency judgment of $145,000!!! In light of this decision we are going to file for bankruptcy and let the home foreclose. We did everything we could to short sale but there is no way we can afford to pay that debt back. In a scenario like this it's best to file BK wouldn't you agree?
Patrick,
I understand your frustration with the bank. I have seen this attitude so often. However, I think there might be a bit of a misunderstanding here.
You see this article is about why you should do a short sale even IF you ARE doing a BK. The intent here is to help people understand why IF they are doing a BK that they want to avoid ALSO having a foreclosure on top of the BK. Most Attorneys will advise their clients that it is irrelevant, and that the BK is so bad that having the foreclosure does not matter. From a legal perspective they are correct; from a lending perspective they are dead wrong.
If your 2nd is threatening a deficiency judgment then whoever is negotiating your short sale must not have conveyed to them that you are looking at filing a bankruptcy. If they had, the Jr lien holder would realize that this is a moot point to pursue as you will have been discharged from the debt by the BK.
So I'd have to disagree with you that your situation isn't addressed by my article. Anyone who decides to take the path I have discussed here, would never ever be responsible for a deficiency judgment of $145,000. Rather they would have completed a short sale, and avoided the negative consequences of having a foreclosure AND a bankruptcy on their credit.
Hope this clears up any misunderstandings for you. I wish you the best of luck.
Corey
Ok I understand what you're saying, thank you for explaining. So what you're saying is that we're protected from BK when we do a short sale that they cannot come after us for a deficiency or tax us correct? The only other problem we have is we're so strapped for money and we're told that at the closing of the short sale we need to come up with $2,300. I would assume you would say it's worth the $2,300 to get the short sale done correct? Also, when we file for BK would that delay the short sale? That could be a good things as we can continue to save more money.
Yes, the BK will protect you from the deficiency judgment. The reason you are protected from the 1099-C is because by default the IRS has a provision vis a vis IRS Form 982 which you can find here http://www.irs.gov/pub/irs-pdf/f982.pdf
Now of course remember I am not an accountant, and so this is for information purposes only. Consult a CPA or Tax Professional to ensure that your situation complies with IRS guidelines for the forgiveness of the tax liability in relation to a cancellation of debt or the receipt of a 1099-C.
Filing will definitely delay the short sale, however if you are close to completing it and have a bonafide buyer I wouldn't risk losing the deal and having it fall apart just to get a little more time in the house. Just my opinion though =)
As to whether coming to closing with $2,300 is worth it, you really need to determine how much it is worth to you to be financeable within 3 years or if you are OK with waiting longer before you can buy a home again. Look at it as $64 bucks a month for 3 years to have the ability to buy a home sooner, if that makes it easier to swallow.
Thanks Corey, very helpful.
Very informative. I'm a mortgage broker and I learned a few things from your Hub I SHOULD have already known!
Great information! I am in a real bind that has been festering for a few years. I am 3 months behind on mortgage and can not continue this way. There is also an interest only second for about a third of the value of the house. We are also facing bankruptcy. Can't believe I brought us here but it is time to get out.
My question...If I can not secure a short sale (and how do the 2 lenders work that out?), does filing for the BK and putting the house in with it equate to a foreclosing with respect to future mortgage borrowing? Thanks again.
John,
If I understand you correctly, I think you are asking me whether or not including the home in the bankruptcy is the same as a foreclosure.
The answer is one of those technical legal concepts that requires an understanding of the subtle differences of the terms used. Bankruptcy is you being forgiven of your debt, or discharged as its called by the legal system. Foreclosure is the legal means by which the bank sells your home for you by proxy. Or in other words (and this is very technical...sorry) when a home is foreclosed, its the OWNER selling it on the courthouse steps, but they are not there in person, rather they are represented by a trustee that is appointed, or hired by the bank.
Ok, so now that you understand what is happening with each term, its important to remember that both can happen simultaneously or independently but they are not the same thing. The bank can sell the house according to the terms of your contract once they have permission from the courts administering your bankruptcy.
Foreclosure is the ONLY means a bank has legally sell a property when it goes into default because they don't own it yet. Only the owner can sell it and so the bank is actually a bidder at the sale that you are holding by proxy.
(Are you bored yet? LOL) so, they are two entirely different things and you can have both.
Which brings me to this: Your question is the point of my article. It makes sense to do a short sale EVEN if you you are including the home in a BK because if you follow everything through to its logical conclusion you don't want to have a foreclosure AND a BK for lending purposes. For legal purposes, its completely irrelevant and that's why most Attorneys advise people not to worry about it.
Now, your second question that I saw hiding in there was about the two mortgage companies and how they work out the differences between them if there is a short sale.
A 1st mortgage is called such because it is recorded against your title first. Or in other words it is a "Senior Lien". Anything that follows is a "Junior Lien" whether it be a 2nd, 3rd, 4th mortgage and so forth.
This is a pecking order of who gets paid first in the event that the property is sold. However, the most relevant information is that this is how they determine who gets what in the event that there is a foreclosure.
If there is not enough equity to cover the full balance of the 2nd mortgage, then the 2nd would have two choices; Either accept whatever is left over after a trustee sale (sometimes nothing) or show up and bid at the trustee sale, thus paying off the 1st and then they would be able to continue the bidding hoping that someone will outbid them resulting in the 2nd getting a full payoff, or if they are the successful bidder they could then sell the property to try and recover their funds.
In a short sale situation, the 2nd has to agree to take less. If they do not they will force the 1st to continue the foreclosure process bringing them to the scenario that I just described above.
That is a very rough 'foreclosure 101' class, so I hope it wasn't too much to take in =)
I also hope it helps you. Please let me know if there is anything else I can answer for you.
First I want to thank you for spending your time answering these questions.
I owed 2.2M real estate loans and $65K credit card debts. I have two foreclosures in my record. I am in BK 7 now. In the US Trustees 1st meeting, I was told that the Trustees are not interested/abandoned the two homes that I currently own and current with mortgage. The trustees told me that I can stay in the house but they are not interested. My questions to you dear are:
1. My primary residence has two loans, $330K & 65K. I am not able to make payment on the 2nd mortgage anymore. Will they start foreclosure even if I am current with 1st mortgage?
2. Since I included everything in the BK and I am sure they will be discharged. If I walk out of the primary residence after the BK discharge, will the bank report this as foreclose and show up on my credit report.
Many thanks.
Hey, this is a great post! I am a real estate broker dealing with a property owner in bankruptcy who is being advised by his attorney not to bother with the short sale of an investment property. I'm trying to convince the property owner and the attorney otherwise. Thanks for the help!
Hello
I just received the approval on a short sale that took 6 months. Now I am contemplating not going through with it because the bank is requesting 129k for the home (buyers offer was 100k) and I owe 275k!!! This puts me at 150k either owed to the IRS with a 1099-C or a judgement from the lender. They did not choose to forgive this and this is written in my short sale pending agreement. I truly think foreclosure is the better option now, and will also file a 982 with the IRS. What do you think? I'm completely broke, single mom stuggling, have some credit cards but mortgages were really the issue. This is an investment property and I am also looking at a short sale for my primary now as well. Thanks
Great post... any advice on how to find short sale properties? What is a fair percentage to pay a person who is trying to do a short sell on his home?
Hello 4closure Rescue! I have been reading with interest your various answers to distressed sellers in BK. I am a buyer waiting for a short sale approval from the sellers' two lenders. The seller went into BK and we may have to pay their lawyer I would assume, a fee to get the property off the BK file in order to move forward and wait for an approval. Our offer is $150,000 over the short sale price but the 2nd lender might take a loss. Why won't the banks jump at a chance at a great offer?
I am a Real Estate agent that has a short sale property ready to close in a couple of days. We have been pending for almost 6 months. My client is also filing bankruptcy. His lawyer just contacted him and told him to stop the SS. That if he doesn't show that high debt from the house on his BK that his payments will be extremely high. This makes no since that the higher the debt the lower his payments will be in the bankruptcy. He is filing I think a chapter 11 (debt repayment). Does it make since to have to show the house as debt.
Fred says:
15 months ago
Question: Is it true that if you do a SS in BK (that will settle after discharge), that you will get a 1099, where if you just let it go to FC you will not get a 1099 for the deficency? Thanks.