Over the last couple years the media has spent a lot of time talking about foreclosure and short sales. One thing they fail to mention is that these same individuals usually are filing for bankruptcy also. It raises one of those plaguing questions, what comes first the chicken or the egg? Many Americans are wondering if people are filing bankruptcy because of foreclosure or is the foreclosure causing them to file for bankruptcy? A new twist called short sales has been added to this full mix of the real estate market collapse. Back in 2008, when the real estate market virtually collapsed the government stepped in with programs like loan modification to bail people out of their loans. The loan modification program was a complete failure with only about 3 to 4% of those applying, actually qualifying. With no other way out, banks started allowing people to sell their homes for less than what they owed on a case-by-case basis. The idea of short selling was to keep the debtor out of foreclosure and save the bank months of legal red tape foreclosing, evicting and after getting the homeowner out of the house, having to fix it up and sell at a loss. It all seems like it makes sense.
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Many people that are upside down on their home are considering filing bankruptcy if they're not already. Many of these same people have spent months trying to sell their home with no success and have been approached by people offering less than what they owe on it. This is a short sale. For the person that is already entered into a bankruptcy filing, they should forget about a short sale. A short sale will trigger a whole bunch of other problems that the debtor won't even find out about until after the bankruptcy filing.
First of all, the short sale is a huge ding on your credit. If you're filing bankruptcy, you are already going to have to deal with the bankruptcy on your credit report for 10 years, why add a short sale.
The second thing is, it triggers a taxable event allowing the lender to send you a 1099C, making the debtor liable for taxes on the deficiency and costs of the short sale.
Thirdly, the whole process is a waste of time if you're filing for bankruptcy. The only person that would benefit from the process would be the realtor and the buyer who is getting a smoking deal.
Last of all, why give up your property in advance when you could continue living there and surrender it in the bankruptcy filing. Enjoy your property rent free while the bankruptcy continues on. Have a bankruptcy attorney negotiate surrender time that will work for the debtor and the lender. This will allow the debtor to stay in their home until the agreed upon time to surrender it. This will relieve a lot of stress that the short sale could create or a foreclosure.
The bottom line is if you're filing bankruptcy anyway why would you want to go through the hassle of a short sale. There is no benefit or extra damage for the debtor that is filing for bankruptcy. The automatic stay will allow the debtor and their bankruptcy attorney plenty of time to figure out what they need to do to move forward. Any deficiencies created by the surrender of the property will be wiped out in the bankruptcy filing.
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