When the housing bubble burst and home values dropped dramatically around the country, many homeowners found themselves underwater on their homes, owing more on the properties than they were worth. Selling an underwater home can be difficult; the mortgage company must agree to a short sale, which means the sale proceeds will fall short of paying off the mortgage. For homeowners facing foreclosure, a home short sale may be a viable option to avoid it. However, you may need to consider consumer bankruptcy if you are struggling with other debt and/or find the mortgage company unwilling to accept a short sale.
People who are underwater on their homes and struggling to keep up with debt payments often want to know whether they can complete a short sale and file for bankruptcy. Yes, you can do both. Often, however, filing bankruptcy renders a short sale unnecessary, although in certain situations, a short sale may still be a good option.
In bankruptcy, you can surrender collateral to a secured creditor. If you surrender your home in Chapter 7 bankruptcy, all remaining liability will be discharged as an unsecured debt. If you surrender your home in Chapter 13 bankruptcy, your Chapter 13 repayment plan will treat the deficiency balance as an unsecured debt. That means the mortgage lender will receive a percentage of that deficiency balance through the plan; the rest will be discharged upon successful plan completion.
If you are thinking about short selling your home, here are some potential benefits to doing so:
- You can avoid a foreclosure on your credit report
- You can feel a sense of pride that you sold your home
- You’ll get to meet the new owners
- You’ll be eligible to buy a home under Fannie Mae guidelines in just two years
There are also potential drawbacks to short selling your home:
- It will adversely affect your credit rating
- You may be required to submit personal records, such as bank statements and tax returns, to the lender
- There are no guarantees the lender will approve the sale
- You’ll need to keep your home in show-ready condition until you receive an offer
- There may be tax consequences if the lender agrees to forgive the deficiency balance
Depending on your particular circumstances, it may be better to surrender your home through bankruptcy. If you surrender your home through bankruptcy, you will not incur any tax liability. Also, you will not have to show your home or stress out wondering if a short sale will go through. However, if you hope to buy another home in the very near future, you may want to consider a home short sale in bankruptcy.
An experienced Kansas City bankruptcy attorney can help you evaluate all of your bankruptcy and non-bankruptcy options. If you are facing foreclosure or struggling to keep up with debt payments, contact a knowledgeable Kansas City bankruptcy lawyer today to start on a path toward financial freedom.