I hear the question almost every day, can I short sale my house if I file bankruptcy?
First, lets first define what a short sale is. When you sell real estate “short,” you are asking the lender to approve the sale without receiving the full amount of their loan, very common now in this depressed real estate market. For example: you bought a home in 2005 for $500,000 with a first mortgage of $400,000 and second mortgage of $100,000. The property is now worth $300,000 and you have a buyer willing to close escrow in 30 days for $300,000. If the first mortgage agrees with the sale, they will receive about $100,000 less than their current debt and the second will receive $0. Typically the second signs off with a nominal payment such as $5,000.00.
Second, yes you can short sale your house in bankruptcy; nothing in the bankruptcy code helps and/or hurts you from getting the short sale approved. You must still go through same painful process of receiving approval from the lender to sell the home. Nonetheless, as a borrower you are not concerned with the deficiency amount due and owing after you filed bankruptcy because any deficiency will have been discharged in the bankruptcy. This fact makes it easier to get a short sale approved.
But realize that as a debtor in bankruptcy your are receiving NO tangible benefit to short selling your house. In bankruptcy any deficiency amount is discharged, or in simpler terms, you are not liable to the lender for any amount due and owing under the loan. The only parties really benefiting here is the realtor and buyer. Since all the work, worries, and monies you provide do not benefit you at all, the entire short sale process is usually done in vain.
Instead, it is usually best to surrender the home after the bankruptcy is filed. Under bankruptcy laws, there is no taxable event on a foreclosure after bankruptcy (except possibly a capital gain in rare cases in today’s economy), the lender can not report to credit bureaus foreclosure but can only report $0.00 balance, bankruptcy discharge (which by the way gets reported in all bankruptcy cases whether you keep the home or not and is generally better than foreclosure or short sale in terms of effecting your credit score), the debt is finalized as non-recourse, you avoid wasting your time and money, and you are able to stay in the property or rent it out longer.
If you have any questions please contact us.
Randy M. Creighton, Esq.
