If you are pursuing a Chapter 13 bankruptcy, you are able to either short sell or foreclose on your home to settle that portion of your debt. The purpose of a short sale is to relieve the borrower’s obligation to pay the difference between the sale price of the home and the mortgage amount when the property is worth less than what is owed. A foreclosure is a much longer process that involves several steps after a homeowner falls behind on mortgage payments. The lender begins the legal process of selling the home at auction in order to get payment for the loan. If the sale price is less than what is owed on the mortgage, a deficiency judgment results. Depending on the jurisdiction, outside of bankruptcy the borrower would be personally liable for the entire amount of the judgment.
In a Chapter 13 bankruptcy scenario, no matter how the home is surrendered (either short sale or foreclosure) any remaining deficiency will be paid out as unsecured debt through the Chapter 13 plan. Because the borrower is responsible to pay some of their unsecured debt through the plan, a short sale that slashes this debt before the bankruptcy is initiated is beneficial. If a borrower can negotiate a short sale prior to filing for Chapter 13 bankruptcy, the plan payment will be reduced because the unsecured debt was reduced through the sale prior to proceedings. Thus, completing a short sale before a Chapter 13 bankruptcy has the potential to lower plan payments.
However, if you are already entangled in bankruptcy proceedings, a short sale and foreclosure will likely result in the same outcome – a short sale only eliminates the legal hassle involved with a foreclosure. If you are thinking about or have already filed for bankruptcy, it is in your best interest to meet with an experienced attorney to discuss your case. An attorney familiar with bankruptcy and real estate proceedings will be able to advise you whether your situation is suited for a short sale or foreclosure and may also be able to help you avoid selling your home.
When you are facing bankruptcy you feel like you have everything to lose. However, an attorney can help you put the pieces back together and make sense of your specific case. Don’t walk through a bankruptcy blindly, make sure you have all the advantages an attorney can give you.
Stephen K. Hachey, a Florida real estate attorney, can help your wade through this process and determine a positive solution. Contact him at 813-549-0096.
The opinions in this post are solely those of the author. The author takes full responsibility for the content. Like all blog posts, this is offered for general information purposes and does not constitute legal advice.