A short sale after bankruptcy is iffy move

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Dear Bankruptcy Adviser,
I have a second, third and fourth mortgage against my property for a total amount of $318,000. I am in default on the first for the amount of $235,000, but my house is only worth $250,000. Wells Fargo is willing to release all three liens for $15,000, but it states that I will still be liable for the difference. If I sell my property in a short sale, pay the bank the $15,000 to release the liens and then file for bankruptcy, can they still come after me?
— Sarah

Dear Sarah,
I have seen this type of situation numerous times over the past couple of years. You believe that a short sale would be better for your credit and increase your ability to buy another home in the future. And the lender is willing to work with you, but will only go so far. It is willing to let the house be sold and is willing to take less than 100 percent of the balance owed. The catch? You will still be liable for the mortgage deficiency after selling the house.

Most people believe this is fair and reasonable. You borrowed the money and are trying to pay less than what you promised. Others might disagree. How is it possible any lender would give you four mortgages against your home? That sounds like the typical, irresponsible lending that got us into this mortgage mess.

Personally, I don’t really care about either position. You need a solution to your problem.

Yes, it is possible for you to file for bankruptcy after you complete a short sale and reach an agreement to pay the lender. You might even be eligible for a Chapter 7 bankruptcy, called a “fresh start” bankruptcy, and wipe out this liability along with other debts.

Still, Chapter 7 might not be an option for you. After you have sold the property and have settled with the lender, you might have enough income left to pay back some or all of your creditors. This means that you might no longer qualify for Chapter 7 bankruptcy because your income exceeds your permissible expenses.

I am assuming you will start renting after you sell the house. This might mean that in the view of the bankruptcy court, you now have the income to pay your creditors. As a renter, you might not have enough permissible expenses to file Chapter 7. If you are able to buy another house prior to losing this one, it might be possible to qualify for the Chapter 7 if your expenses are greater than your income.

I do tell people that they can file for bankruptcy on their own without an attorney’s assistance. However, before you complete the short sale and attempt to file bankruptcy afterward, I implore you to consult with at least two bankruptcy attorneys. You need someone to assess your situation before the property is out of your name. A competent attorney should have good advice for you.

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