Making a Choice Between Bankruptcy and Short Sale

Homeowners who are underwater on their home mortgages (underwater mortgage means that the homeowner owes more than his/her house is worth) often attempt to do a short sale. A short sale occurs when the homeowner sells the home to a third party for less than what is owed on the note, and the mortgage lender accepts the proceeds of the sale in full satisfaction of the note. The mortgage lender must approve the short sale before it can go through. A short sale can be a good option for homeowners who do not want to keep their homes, and are willing to move out almost right away.

However, before going through with a short sale, a homeowner should see if Chapter 7 Bankruptcy would be a better option. In a Chapter 7 Bankruptcy, the homeowner’s liability on the note is discharged and the home does not have to be surrendered right away and the homeowner does not have to immediately move out of the house. The homeowner can continue to live in the house without making any payments while the lender goes through the lengthy process of foreclosure. In New York, foreclosures can take years before the mortgage lender can hold a foreclosure sale. Even after the house is sold at foreclosure sale, the new buyer (which is often the mortgage lender itself) has to start eviction proceedings to evict the homeowner from the home. This may give the homeowner time to save up money for a move or a new home. Any shortfall that may result from the sale of the house is eliminated in the bankruptcy, meaning the homeowner owes the mortgage lender nothing when they move.

A final, and highly significant, difference between Chapter 7 Bankruptcy and short sale is tax advantages of a bankruptcy filing. When a mortgage lender accepts a short sale, the homeowner will have to pay taxes on the amount forgiven by the lender. Under the tax code, debt forgiveness is considered income and the mortgage lender will generally send the homeowner IRS Form 1009-C form for it. The homeowner will have to report it as income on his/her tax return. As a result, the amount of forgiven debt will be added to the homeowner’s income as miscellaneous income, and while not subject to self-employment or social security tax, it will be subject to income taxes. If the amount of the forgiven debt is significant, the debtor may face an unexpected tax liability amounting to thousands of dollars. In a Chapter 7 Bankruptcy, there is no tax liability for the debt that is eliminated as a result of the filing.

Deed in lieu of foreclosure is similar to a short sale. The main difference is that unlike short sale where the property is transferred to a third party, in deed in lieu of foreclosure, the property is transferred directly to the lender. It has tax consequences identical to those of a short sale.

Short sales and Chapter 7 Bankruptcies are both good options for homeowners who want to walk away for their homes and their mortgages. When your home is underwater and you are considering a short sale, it is important to talk to an experienced bankruptcy lawyer first. That way you can review your options and make an informed decision.

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.

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