This Attorney Never Recommends Short Sale
We had a local bankruptcy attorney speak at our sales meeting this past week and were given a whole new perspective on short sales. We all know that many people are in trouble with their home loans and other debt, and we hear a great deal about short sales and foreclosures, but this is the first time I have heard bankruptcy discussed as an alternative. If spoken of at all, it is usually as a last resort, to be avoided if at all possible – perhaps because the perception is that the bankrupt person is left with nothing and can get no credit for 7 to 10 years. It seems that isn’t the reality.
Before continuing, let me emphasize that I am not an expert in this area and strongly advise you to talk with an attorney before taking any action. The purpose of this article is to get you thinking enough to thoroughly explore your options.
There seem to be 2 kinds of bankruptcy that are most commonly used by individuals: Chapter 7 and Chapter 13. They are quite different, but in neither case is the individual stripped of everything (s)he owns. Chapter 7 takes about 4 months to complete. Assets are sold and creditors are paid according to the type of security they have (a mortgage would be a strong security interest). The person filing can keep up to $125,000 of their home equity (if they have no equity, they can keep up to $11,000 per individual or $22,000 per couple from other assets). They can keep all retirement accounts. They can keep up to $3200 value in a vehicle and a variety of household goods, clothing, etc.
If someone wants to keep their house, they would look at Chapter 13. This puts a foreclosure on hold and provides for a financial reorganization of the filer’s assets and liabilities. A plan is submitted to the court to bring the filer current with the debt over a period of 3 to 5 years, and portions of the debt may be shed (sounds like 2nd mortgages and credit cards are particularly vulnerable). Part of the plan may be a mortgage modification under the federal HAMP program that can lower interest rates or principal. The attorney calls Chapter 13 bankruptcy “a debt reorganization plan that works,” unlike scams advertised on late night TV or phone calls from telemarketers who promise, but can’t deliver.
Banks servicing loans held by Fannie Mae or Freddie Mac are required by law to participate in the HAMP (Making Home Affordable) program although some large lenders seem to make it so difficult that it simply never happens. A person does not have to be in bankruptcy to use the program, but it sounds as though a letter from a bankruptcy attorney moves it along much more quickly.
So why does the attorney advise against short sales and in favor of bankruptcy? In a short sale, the homeowner may very well end the process without their house but still owing money to the lender (it is called “the deficiency) because the lender may not otherwise give permission for the sale. Neither form of bankruptcy leaves debt hanging over the filer, and with Chapter 13, they may also keep their house.
This is a very simple overview of a complex process. If you are behind on your mortgage, underwater in your home value or struggling to pay your bills, check out all your options. The impact on your life and your family is too big to make an uninformed decision.