Is a Short Sale a Good Idea During or After Bankruptcy?

 Posted on May 27, 2022 in Bankruptcy

A homeowner who has encountered financial difficulties may have a number of options that will allow them to avoid losing their home. While different forms of bankruptcy may be an option that will allow a person to prevent foreclosure, there are some situations where maintaining ownership of a home will not be possible. In some cases, a person may consider a short sale of their home, which will allow them to sell the property for less than the amount owed on the mortgage without the requirement to pay a deficiency to their lender. However, a homeowner will need to understand whether it is a good idea to do so while also pursuing debt relief through bankruptcy.

Short Sales and Chapter 7 Bankruptcy

Chapter 7 bankruptcy will allow a person to discharge most of their debts, providing them with financial relief and ensuring that they can avoid difficulties in the future. In most cases, it will not be a good idea to pursue a short sale before, during, or after filing for Chapter 7. One of the primary benefits of a short sale is to avoid a deficiency judgment that may be owed to a mortgage lender if a home is sold for less than the amount owed on the loan. However, Chapter 7 will discharge the debts a person owes, including deficiency judgments, so pursuing a short sale will not provide a homeowner with any advantages. 

In general, allowing a home to be foreclosed upon is a better option than pursuing a short sale after bankruptcy. Going through the process of selling the home may involve expenses without providing a person with any financial benefits. However, foreclosure may allow a person to stay in the home for a certain period of time until they are required to vacate the property. While they will not be required to make mortgage payments during this time, they may need to pay taxes, insurance, and homeowner’s association fees. Before they leave the home, they may be able to save money as they find new living arrangements.

If a person chose to reaffirm their mortgage during the bankruptcy process, the amount owed to the lender will not be discharged, and if they encounter financial difficulties after completing the bankruptcy process, they may be unable to pursue bankruptcy for a second time. In these situations, a short sale may be the best option.

Short Sales During Chapter 13 Bankruptcy

If a person does not qualify for Chapter 7, they may pursue Chapter 13 bankruptcy as an alternative. In these cases, they will be required to repay some of their debts through a monthly repayment plan that will last between three and five years. If a person is unable to avoid foreclosure, any deficiency judgment owed to a creditor may be included in their repayment plan. In these situations, completing a short sale may allow a person to avoid a deficiency judgment, reducing the total amount owed to creditors and potentially lowering the amount that they will be required to pay during the course of a Chapter 13 case.

Contact Our New Braunfels Bankruptcy and Short Sale Lawyer

If you will be unable to keep your home during the bankruptcy process, you will want to understand your best options for minimizing your losses and avoiding financial difficulties. The Law Offices of Chance M. McGhee can advise you on whether you should consider a short sale or whether other options may be more beneficial to you. Contact our Kerrville short sale attorney at 210-342-3400 to discuss bankruptcy and other financial issues in a free consultation.

Sources:

https://www.investopedia.com/ask/answers/100314/whats-difference-between-short-sales-and-foreclosures.asp

https://www.law.cornell.edu/uscode/text/11/523

https://www.irs.gov/newsroom/home-foreclosure-and-debt-cancellation