What's to Be Gained From a Short Sale?
What do you gain from a short sale, either after you have already discharged the debt in bankruptcy or as you are planning to discharge it in bankruptcy? In order to understand the question and the answer, I'll provide a little background.
In this economy, it is common for people who cannot pay their mortgages to file bankruptcy. A chapter 7 bankruptcy discharge eliminates your mortgage debt. A chapter 13 bankruptcy eliminates your mortgage debt, if you surrendered the home in your plan.
In this economy, it is also common for a home to have a value that is less than the amount of the mortgage or mortgages. For example, a home would sell for $150,000, but the payoff on the mortgage is $165,000. How can you sell your home if the sales price is less than the mortgage balance? "Short Sale" is the answer.
To sell your home by short sale, you must find a buyer who is willing to make an offer to buy the property contingent upon approval of the "short sale" by the mortgage lender. That's not difficult; there are many buyers who would love to buy your $150,000 home for $130,000 or $120,000 or less. The difficulty is getting the mortgage lender to approve the deal, for it's the mortgage lender who is in control. You must persuade the mortgage lender to release its mortgage lien for less than is owed on the loan. You must convince the lender that it's unlikely that you will be able to pay off the full balance of the loan and, if your home goes into foreclosure, the lender must be convinced that it will not get more from an auction than it would from a short sale.
But if you have already discharged the mortgage debt in a bankruptcy, why would you want to sell your home in a short sale? One common answer is to avoid having a foreclosure on your record. But, you've already got a bankruptcy on your credit record; how much harm can a foreclosure cause? In other words, whether you do a short sale or just allow your home to go to foreclosure, you're in about the same position for your next mortgage loan.
So, what can the bankrupt seller or soon-to-go-bankrupt seller gain from a short sale? Remember that a chapter 7 discharge eliminates the mortgage debt. And in chapter 13 bankruptcy, if the plan surrenders the property, the discharge will also eliminate the debt. The only debt remaining that the bankruptcy discharge has not eliminated is the post-filing HOA dues. A bankruptcy discharge does not eliminate your obligation to pay HOA dues and assessments that accrue from the date of bankruptcy filing until there is a new owner. If you have received or will receive a bankruptcy discharge, a short sale closing will transfer ownership to a new owner, and your obligation to pay HOA dues will stop.
If your home is not in a HOA, it is unlikely that a short sale will benefit you, the seller. You will gain nothing that you did not already have. And, in a short sale transaction, the lender will often report the unpaid balance as "debt forgiveness" to the IRS, which will be counted as ordinary income on your tax return for the year of the sale.
A short sale is worth it if you can stop the HOA obligation and successfully avoid taxes on the forgiven debt.
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The statements of law made here are general statements of law, effective at the time published and subject to change from time to time. These statements are not intended, nor may they be construed, to be applicable to any particular set of factual circumstances nor to any particular person. I recommend that all readers seek the assistance and advice of an experienced bankruptcy lawyer for guidance in their particular circumstances.
© Copyright 2013 David C. Hoskins, licensed Colorado lawyer