Short sale, foreclosure, or bankruptcy: Which is best for you?

Fri, Oct 5, 2012

Bankruptcy, Debt Mitigation

Today’s tough economy has forced many people into a financial corner that they feel they cannot escape. Job loss, long-term unemployment, under-employment, and rising costs have created a tough decision for many homeowners: How do I deal with a mortgage I can no longer pay?

Attorney Christopher D. Smith with SmithLaw in Sarasota, Florida is often asked, “Which is best for me? A short sale, foreclosure, or a bankruptcy?”  Since everyone’s situation is different, it is hard to answer that in a blog post or without a consultation. Different financial situations make that answer different for many. In addition, there are things to consider like other financial assets, family situations, and the state of your other bills.

Here is an analysis of each situation and how it would possibly work for you:

Short sale

A short sale is when you sell your home for an amount that you and the bank negotiate. You live in your home until the short sale is completed (or until the bank tells you otherwise, depending on how the short sale goes). The amount is smaller than you would traditionally sell the home for and it is usually not enough to pay back all of the loans owed on the home. However, it is an amount that you and the lien holders have agreed to in an effort for them to recoup some of the money due them. Each loan and lender is unique, meaning some loans (like an FHA loan) might have different requirements than other loans.

The remaining amounts left on the loan or loans after a short sale are considered deficiencies. The creditors can come after you for that amount unless other arrangements are made. This could mean that you would still owe a significant amount to your mortgage holders, especially if you have more than one mortgage. A short sale may also affect your credit, since you probably still owe the deficient amounts. In addition, there are tax issues to consider.

Many homeowners are working on short sales in an effort to avoid foreclosure.

Foreclosure

A foreclosure happens when you stop paying your mortgage and the bank auctions your home in an effort to get its money back.

You are required to leave your home. The money you owe after auction, including miscellaneous fees, will show up on your credit report. There is still going to be debt in your name even after the foreclosure, as well as potential tax implications. Some people are trying to stay in their home as long as possible, for whatever reason, and might feel foreclosure is their best option.

Bankruptcy

Bankruptcy is not a one size fits all situation. Some people think that they will file for bankruptcy and all their debts are essentially wiped out. This not always true, and bankruptcy is never without some unpleasant consequences. Bankruptcy will affect your credit score and you could lose much of your personal property or still owe some of your debt in a restructured way

It is important to discuss how a bankruptcy would affect your mortgage with an attorney. They can help you decide when and if to file—timing could make all the difference because a bankruptcy filing can often disrupt the foreclosure or short sale process.

The action you choose when facing the loss of your home is important. It is very beneficial to discuss it with a trusted attorney that can advise the advantages and disadvantages. They can help you wade through all of your debts and the tax implications, in an effort to make the best decision for your specific situation. Your mortgage is important, but other bills and obligations can outweigh the need to keep your home—making the decision for short sale, foreclosure, or bankruptcy all the more difficult.

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