There are large numbers of Americans that are filing for bankruptcy or considering it seriously. Many of these people have been pushed into this situation because of their house that they can't afford. With the lender breathing down their neck threatening foreclosure, these individuals throw their hands up in the air in wonder. Not knowing what to do, they contact their local realtor for advice. With the main goal of avoiding foreclosure, they offer the advice of short selling their property to get out of debt and hopefully avoid bankruptcy.
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A short sale is when you ask the lender to approve you selling the real estate you own for less than what you owe on it. In this depressed real estate market, many banks are allowing these types of sales. Many times, the problem arises when the debtor has a line of credit or a second trust deed taken out on the property. If the property is sold for less than the first, the lienholder of the second will receive nothing. Usually, a short sale will trigger a host of problems that the debtor will not discover until months later. This is one reason for a debtor in this situation to hire a bankruptcy attorney and file bankruptcy in lieu of the short sale.
One downside to a short sale is it triggers a taxable event that allows the bank to issue a 1099C for the deficiency. This form is filed with the IRS as taxable income. If you thought getting out of your house would get out of trouble, think again, you'll now owe the IRS taxes on the deficiency. If Filing bankruptcy wasn't in your plan it is starting to sound pretty good now.
Most individuals that are trying to do the right thing will realize that a short sale will also damage their credit. Short selling in actuality is breaching the contract with the lender and since the debtor did not pay the debt in full, the lender will report it to the credit agencies. Once again, trying to avoid filing bankruptcy and foreclosure to do the right thing can end up biting you in end.
Basically, this exercise is a waste of time and money. The only people that really benefit from a short sale is the buyer and the realtor who receives a commission. If you're not trying to hang on to a piece of property, it is probably in your best interest to consult a bankruptcy attorney about filing for bankruptcy. When an individual files for Chapter 7 bankruptcy and automatic stay is put in place stopping all collection activity from the creditors. This gives the debtor time to decide what to do with the property in question. They are planning on trying to sell it, they can surrender the home to the lender in the bankruptcy filing and eliminate any future liability. Filing bankruptcy will also wipe out any unsecured debts like credit cards and medical bills, along with any tax liability from a short sale deficiency.
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