Short sale or foreclosure?

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Dear Bankruptcy Adviser,
To avoid foreclosure, my house is up for a short sale. I am currently unable to make the payments on my house and I want to apply for Chapter 13. What kind of time do I have?


Dear Nahid,
You are in dire straits. Let’s get directly to the heart of the matter so you can start making good choices quickly.

If you are unable to make the mortgage payments on your home, Chapter 13 is not an option. Chapter 7 may be an option, but you will still lose the house through the foreclosure process. This combination of bankruptcy and foreclosure (both will appear on your credit report) will decimate your credit.

You are smart to put your house up for sale, even if it is a short sale. For those of you who don’t know, a short sale is when you sell the property for less than what you owe and your current mortgage lender accepts those terms.

For example, if you owe $300,000, then find a buyer who is only willing to pay $250,000, you negotiate with the lender to accept the offer. The lender then will send you a tax form showing that you have been forgiven $50,000 in debt. Most of the time, when you execute a short sale you will not owe any taxes on the difference.

By selling your house, even if you file Chapter 7 bankruptcy, you will not have the foreclosure notation on your credit report. This may seem minor, but it makes a substantive difference to your ability to rebuild your credit and/or purchase a home in the future.

In general, Nahid, anytime you sell your home, you must be prepared to move immediately after the deal closes. The question is, how quickly do the new buyers want to move in?

If the buyers are people who actually plan to live in the home, you will have to move immediately. While some new owners will take their time in starting the eviction process, this is not a wise expectation. An eviction could show up on your credit report and this can be just as devastating as a foreclosure.

If the buyer is a bank, it is likely to aggressively pursue the eviction process. However, there are cases in which the bank does not evict the tenant immediately because no suitable buyer has been approved for a loan. In this case, you could have a few months to move. But this is also not a wise expectation.

The wise expectation is that if you sell your home, you will have to move immediately. Nahid, it is time for you to get proactive. I strongly suggest that you begin the process of looking for a new place to live as soon as possible. Good luck with the short sale!

Justin Harelik is a practicing attorney in Los Angeles. To ask a question of the Bankruptcy Adviser go to the ” Ask the Experts” page, and select “bankruptcy” as the topic.