History of the Short Sale
It really does not matter whether you file a Chapter 7 or a Chapter 13, you can still have short sale problems even after filing a bankruptcy. Up until recently, a short sale rarely worked even before filing a bankruptcy.
When the economy was good and the real estate market stable, there really was not much incentive for a mortgage company to agree to a short sale. Even in pockets around the country where the real estate market had already hit the doldrums, the inventory of good mortgage loans outweighed the necessity for a mortgage company to give any consideration for a short sale when they could wait on the market to recover.
The recent economic crisis and housing meltdown has now changed all of that. With their inventories now full of property to be foreclosed, the mortgage industry has taken a closer look at the advantage of making a short sale in lieu of foreclosing on the property.
Advantages of the Short Sale for Creditors and Debtors
Theoretically, a short sale under today’s real estate market can often prevent a complete loss by the mortgage company, remove any existing and ongoing expenses on the upkeep of the property, and provide a cheaper alternative to foreclosure. Since the mortgage company controls how much money a short sale can be approved, the loss generated by a short sale is a risk that can be calculated with some amount of accuracy.
The short sale can release a debtor from financial obligations to pay off the loan, relieve the debtor of insurance and tax burdens on the property, and remove the debtor’s name from the Title of Deed.
Short Sale Problems for Both Creditor and Debtor
On the other hand, a short sale can provide numerous problems for both the mortgage lender and debtor, especially if that debtor has not filed for bankruptcy.
To a creditor, a short sale under today’s real estate market can still cause any of these problems:
the risk the real estate market will recover soon after a short sale is made;
too many short sale properties might change the profit and loss statement of the lending institution to the point of being downgraded; and
if there is a second mortgage and lien on the property, there most likely will not be enough money to settle on the second lien making the lender less likely to want to approve the sale.
To a debtor, the short sale can also create any of these problems:
a second lien holder, unless the debtor has removed the lien holder through filing for bankruptcy, can be a problem for a short sale;
the deficiency, if not alleviated by agreement between debtor and creditor can be a problem for the debtor when tax time arrives; and
there are closing costs in a short sale like any other sale of a home. The closing costs can create problems for a homeowner facing bankruptcy.
The Bankruptcy Remedy
If you decide you want to make a short sale after filing for bankruptcy, the bankruptcy can discharge deficiencies on the sale of your home, secondary mortgages and liens, and homeowners association fees made before filing.
- Can a Creditor Report a Repossession of a Non Reaffirmed Property After a Bankruptcy Discharge? (betterbankruptcy.com)
- Is a Creditor Continuing to Contact You After Bankruptcy? (betterbankruptcy.com)
- What Can You Do in Bankruptcy When You Have Multiple Mortgages? (betterbankruptcy.com)
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