One of the most common questions I’m asked from clients is whether a short-sale is a viable option for a person who will be filing Chapter 7 or Chapter 13 bankruptcy, but who is not able to retain their home.
A short-sale is the sale of real estate at a price that is insufficient to cover all costs associated with the sale of a property. These costs include the payoff of all mortgages and liens encumbering the property, transfer taxes (1.5% of the sales price in Delaware), outstanding property-related taxes, and realtor commissions, which average 6% of the sale’s price. This means, the mortgage lenders must agree to accept less than what they are owed, and the homeowner must agree not to receive any proceeds from the sale of the property.
Generally, my experience has been that short-sales provide no financial benefit to a homeowner who is considering bankruptcy. Unless the property in question is a condominium, or a home that incurs substantial homeowner’s association dues, the mortgage obligation will be discharged in bankruptcy, and the homeowner may simply surrender the property to the mortgage lender and move out. The homeowner will still be responsible for the upkeep of property surrendered in bankruptcy as long as the property’s title remains in the homeowner’s name. Property title will not be divested until the foreclosure process is completed, and property is sold at the Sherriff’s sale by the mortgage lender.
Since condominium fees and homeowner association dues may not be discharged in a Chapter 7 bankruptcy, there may be some benefit to pursuing a condominium short sale, even after the mortgage lender has initiated foreclosure proceedings and has obtained a foreclosure judgment. In this instance, a short sale would be one strategy to mitigate the costs of accrued condo fees.
If bankruptcy is not an option for you, a short-sale will have less of a negative impact on a homeowner’s credit rating than a foreclosure, provided that this short-sale is completed before the home goes into foreclosure (i.e., before the mortgage lender obtains a court foreclosure judgment). A foreclosure judgment remains on your credit rating for seven (7) years. A pre-foreclosure short-sale, in comparison, will remain on your credit 2-4 years. For example, a homeowner who sells their home through a short sale pre-foreclosure may be able to qualify for a mortgage four years from the date the sale closed, with a 10% down payment for the purchase of a personal residence; or 2 years with 20% down.
Homeowners should also beware of potential tax implications for a short sale, unless the home is your personal residence. The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence, applicable to debt forgiven in 2007-2013.
Please contact us at (302) 733-0411, or Cynthia@CynthiaCarrollLaw.com to explore your debt relief options, including bankruptcy, or other non-bankruptcy debt relief options such as debt settlement or short sales.