Should I Do a Short Sale or File Bankruptcy?

As an Orlando Bankruptcy Attorney, many of my clients and potential clients want to know if doing a short sale is better than filing bankruptcy and vice versa.

The answer really depends on a number of issues such as:

  • The type of home that you own
  • Your current income
  • How long you want to remain in the home
  • Whether it is your primary residence or an investment home
  • Other debt that you may be carrying at the time you do the short sale

What makes the decision that much more difficult, is that many real estate agents are in the ear of my clients and potential clients, pushing to sell the property short.

The real estate agent has a financial interest in seeing that the short sale goes through.  In fact many real estate agents, if they’re honest, will tell you that the only way they are making money in this down market is by executing short sales.

So, the things you should consider when deciding whether to file bankruptcy or do a short sale are the following:

Is the home your primary residence?

This is important because under the Mortgage Forgiveness Debt Relief Act of 2007, if you are doing a short sale on a property other than your primary residence, you could incur a tax liability.  In this transaction, the lender agrees to accept less that what you owe on the loan.  For example, if you owe $150,000 on the loan and agree to do a short sale for $1oo,ooo, there is a $50,000 difference or deficiency.  This $50,000 deficiency can be treated as taxable income for the year that you conduct the short sale if the property is not your primary residence.

If the property is your primary residence and you have no other significant debt, then perhaps a short sale is in your best interest, so long as you meet the limits under the Mortgage Forgiveness Debt Relief Act.

Do you have other debts in addition to the mortgage debt?

For example, do you have credit card debt?  Do you owe medical bills?  Repossessed vehicles?  Other types of unsecured debt?  If you answered “Yes”, then bankruptcy may be a better option than doing a short sale.  Bankruptcy may be able to eliminate all of that unsecured debt.

You can do this by filing a Chapter 7 Bankruptcy or a Chapter 13 Bankruptcy.  In some cases when you do a short sale, lenders will require that you execute an unsecured promissory note in conjunction with the short sale documents.  This is why I advise clients to let an experienced Orlando Bankruptcy Attorney review the documents that the lender would like them to sign.

It makes no sense to do a short sale, thinking that you are walking away from the property, only to discover that you are still liable for the deficiency balance on the mortgage loan.  So, I recommend that you get an attorney to review any paperwork provided to you by the lender before signing anything in regard to a short sale.

So, to recap, a short sale is an option that I advise my clients and potential clients to take in limited scenarios.  In a scenario where the mortgage debt you are looking to walk away from is on a property that is your primary residence and you have little or no other debt, then doing a short sale may be a good option for you.  However, if you have other debt you are looking to Discharge, other than real estate debt, such as credit cards, medical bills, vehicle repossessions, etc., then filing bankruptcy may be a better option because the bankruptcy will deal with all of your debt, not just the mortgage debt.  Finally, if the property you are looking to do a short sale on is not your primary residence, then you could incur a tax liability for the year that you do the short sale.

Creative Commons License photo credit: clogozm

  1. Should I Do a Short Sale After I File Bankruptcy?
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