Short Sales and Bankruptcy

Short Sales and Bankruptcy

Should you short sale your property in bankruptcy? A short sale is when you don’t have enough money to pay off your mortgage and you want to sell your property and get out of the property. In exchange, you get the bank to agree to release its lien and hopefully forgive your debt entirely.

The bank has to be satisfied with what the purchase prices is and agrees to let you out of the difference. In the alternative, maybe the bank will negotiate a reduced balance you owe them after the short sale.

The question a lot of people have is do they need to short sale after they file bankruptcy. The answer is almost certainly no, because your filing of a bankruptcy will put you in a position where if you do not reaffirm the mortgage in bankruptcy, you get rid of the obligation on the note. Since owing nothing on the note is the end game of a short sale anyway, what would be the point of doing a short sale in bankruptcy?

Well there are some small exceptions, but for the most part once you file Chapter 7 bankruptcy, there is no need to do a short sale. The minor exceptions would be if you have a co-debtor. For instance, if your spouse is on the note with you, the short sale would be needed to protect your non-filing co-debtor from owing the balance.

Additionally, you might have moved out of the house already, but you are technically liable for homeowners association dues, government ordinances and personal injuries on the properties while you are on title. Therefore, to get rid of the possibility of owing for those things, you might want to do a short sale rather than wait forever for the bank to foreclose.

But for the most part, those situations are few and far between, and usually few do a short sale after you file bankruptcy. It is not that you can’t, but rather it is that usually you are just doing the realtor a favor by doing the short sale, because you are already out of the debt by virtue of the bankruptcy filing.

The final another exception which could make the difference is that you are in chapter 13 bankruptcy, and you do not want to keep the house. You might want to do a short sale to free you up from the mortgage payment and either pay more to your creditors on a monthly basis through the Chapter 13, or just voluntarily dismiss your case.

Those are some reasons to do a short sale, but for the most part, the bankruptcy stops the debt and therefore the short sale usually is unnecessary.