Short Sale Deficiency from Home Sale
Short sales were common from 2008 to 2012 when housing prices crashed, and many people owed more on their mortgage loan than their house was worth. People could no longer afford their payments and were facing foreclosure. As an alternative to foreclosure, people would short sell their homes to try to mitigate their losses by working with the lender. Today’s post will discuss what a short sale is and how filing bankruptcy can eliminate a short sale deficiency judgment.
What is a short sale?
A short sale, or pre-foreclosure sale, is where the lender (the bank) agrees to accept less than the amount still owed on the mortgage. A short sale can allow the homeowner to avoid foreclosure and get out from under their mortgage. The owner will walk away from the home with no profit, and the lender will take a loss for selling the home for less that the amount owed. The difference between the sales price and the amount owed is the deficiency amount. Some lenders will allow the deficiency to be forgiven or waive the deficiency, while others will seek a personal judgment against the homeowner for the deficiency amount.
General Short Sale Process
The homeowner works with the lender to see if they can be approved for a short sale and states that they can no longer afford the mortgage payments. The homeowner then lists the property for sale and the lender will approve or disapprove the sale amount. If the lender agrees to the new homebuyer’s price, the sale contract is approved, and the home is transferred to the new buyer. Note that a short sale is different than a foreclosure sale, where the lender has possession, and the lender is the one listing the home at auction.
Short Sale Issues
It is common for the lender to make the seller do an enormous amount of work only to reject the offers on the residence. This drags the issue out and keeps the seller on the hook for caring for the property and making attempts to get buyers to make higher offers. Often people will attempt to sink money into the property in an attempt to satisfy the lender’s required bids. Quite often the amount the lender requires is unknown and they will not give an exact amount, leaving the seller guessing as to the number they have to hit to make the short sale a reality.
Filing Chapter 7 bankruptcy to mitigate a short sale deficiency.
If someone decides to file for Chapter 7 bankruptcy and they are trying to short sell their home, they can simply surrender the property back to the bank though the bankruptcy. The debtor will no longer be liable for the mortgage payments and the bank will foreclose to take away the owner’s responsibility and clear the title. If you already sold the property and the bank has a deficiency action against you, you can discharge the amount through Chapter 7.
Filing Chapter 13 to mitigate a short sale deficiency.
Someone can still surrender their home in a chapter 13, and any deficiency amount will be treated as unsecured debt. Depending on your repayment plan, the amount that will be paid depends on your income and other debts you might have. Unsecured debt is rarely paid in full and upon completion of the chapter 13, the debt will be discharged.
If you need help deciding whether to short sell your home or surrender it in bankruptcy, speak with one of our attorneys to discuss your options. It might save you an enormous amount of time and energy and help you determine if the short sale process is even worth going through. We have bankruptcy attorneys in Wichita, Topeka, Lawrence, and Overland Park. Please feel free to contact us for a free consultation.