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Short Sale vs Bankruptcy

Two Ways to Save Your Home

When you decide to get out from under real estate, is a short sale vs. bankruptcy an option? Short sales avoid foreclosure. Bankruptcy in Ohio will generally result in a foreclosure. But a short sale could leave you short of cash. Sometimes you have to pay the lender to get out of the house. Here are some things to consider.

Short Sale or Deed in Lieu vs. Bankruptcy

When you owe more on your home than you can sell it for, you’re stuck. Unless you want to make up the difference by writing a big check to the lender at closing, you need another option. Short sale vs bankruptcy analysis is needed. A short sale is when the lender agrees to take less than you owe on the mortgage. The lender releases the mortgage and you can sell the home.

But sometimes you still owe some money. Short sales don’t always result in you being able to walk away without a loss. These non-bankruptcy options can be better than bankruptcy, or might be a trap. It’s important to compare short sale vs bankruptcy options before you make any decision.

Deed in lieu of foreclosure happens when you voluntarily deed the property to the lender. This saves the bank money because they don’t have to foreclose on you to get the deed to the home. This can be a good move if you don’t have other debt, and the house is the main problem. Deed in Lieu also allows you to avoid having a foreclosure on your record.

Your chances of getting a mortgage sooner are better without the foreclosure. In this case, the short sale vs bankruptcy would favor the non-bankruptcy approach.

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Drawbacks of Short Sales and Deed in Lieu

Like anything, there are a few disadvantages to deed in lieu or short sale. These options create tax consequences sometimes. If you allow a home to go to foreclosure, and it’s your residence, the IRS will not tax you on the loss. If you discharge the debt from the home in bankruptcy, no tax consequence either. But if your elect a short sale or deed in lieu and do not file bankruptcy, then you will normally be taxed on the loss.

The tax consequences can hurt! I once filed a bankruptcy for a client who thought he has done well by entering into a deed in lieu of foreclosure on his home. The loan was actually forgiven by the lender, and he was almost $100,000 short.

This was great, he thought, until he ended up with a $40,000 income tax bill. The IRS treats forgiven debt as if it is income you receive, even though you don’t actually get any money. We had to file bankruptcy to fix this. He didn’t do the short sale vs bankruptcy analysis with me, but wished he had.

Short Sales After Chapter 7

Most of the time today, we avoid reaffirming mortgages in Chapter 7. Most lenders do not even ask you to sign a reaffirmation agreement. Credit unions usually do, but banks usually do not. If you file Chapter 7, and do not reaffirm the mortgage, you normally continue to live in the home and make your payments. When you sell it, you pay off the mortgage and keep the profit. But happens if you later cannot make the payments?

In these situations, you can safely pursue a deed in lieu or short sale, and have no fear of tax consequences. The reason is that you already discharged the debt in your Chapter 7 and did not reaffirm it. When you consider short sale vs bankruptcy, don’t forget the tax consequences.

Short sales and bankruptcy involve several considerations. Since everyone’s case is different, no “once size fits all” rule is possible. I’ve handled thousands of these cases, and offer a free consultation to explain what’s best for your particular situation.

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