If you can’t manage your debts, you’ll want to find a solution to pull yourself out of the situation. For instance, if you can’t keep up with your mortgage payment and are facing the foreclosure risk, it’s reasonable to sell your house in what’s called a short sale. Although selling the home means you will not keep it, it will save you from the embarrassment and pain of foreclosure. Alternatively, you can also file for bankruptcy.
However, there are several things involved in a short sale or bankruptcy filing that need legal advice from a skilled bankruptcy attorney. At Los Angeles Bankruptcy Attorney, we’re committed to helping clients find the best solution for their financial difficulties. If you are torn between a short sale and bankruptcy and can’t decide which is the right thing to do, please don’t hesitate to contact us for expert advice, which we will give only after thoroughly reviewing your financial situation.
Short Sale & Short Sale Deficiency Overview
If you’re having trouble making your monthly mortgage payments, a short sale may be an ideal solution for you to avoid foreclosure. So what’s a short sale? A short sale is a term that refers to a scenario where you sell your house for less than what you still owe on your mortgage. In a case like this, the home is also generally worthless on the market compared to the amount you owe on the loan. Here, your lender agrees to accept the sale proceeds and then releases the lien on the house. Then the proceeds from the sale pay off a percentage of the loan you owe.
After short-selling your house, the total mortgage debt you owe exceeds the sale price. This means the amount you sold the home is short of the total amount you need to repay the loan. The difference between the total mortgage debt and the sale price is what’s known as a deficiency. Consider this scenario: Your creditor agrees that you sell your house at $400, but your mortgage is $500. The $100 difference is a deficiency.
As we mention, you can short-sell your house to prevent foreclosure. You could also do it to avoid bankruptcy, although sometimes declaring that you are bankrupt is still unavoidable. If you’re considering a short sale, you should know that you may still be on the hook for the deficiency.
A short sell can help you become debt-free and enable you to sell your home without being pressured into foreclosure. Opting to short sell your home means you’ll be working with your creditor to reach an amenable term to sell your house for less than the mortgage price, and the creditor will agree to the price as full payment. California law states that any deficiencies won’t be the homeowner’s responsibility to pay. The bank has to answer any short sale request within twenty-one days of submission. If the bank accepts your request, you could work with a real estate agent to sell the house.
Usually, your lender will require you to prove your incapability to repay the mortgage or economic hardship to be eligible for a short sale. You, on the other hand, must write a convincing letter explaining why you need to short-sell your house.
A Deficiency Judgment Following a Short Sale in California
In a short sale, the creditor accepts the amount of money you sold the house, and in exchange, they release the lien on the mortgage. Except if the creditor consents to add a provision to the short sale agreement which mentions the transaction fully satisfies the loan debt, they generally retain the legal right to obtain a deficiency judgment. A deficiency judgment is a court’s ruling against a debtor in default on a secured loan, showing that the property sale to repay the loan didn’t cover the debt in full. It’s mostly a legal claim against the debtor for more money.
However, California law forbids deficiency judgments after a short sale of residential property with not more than four units. This law applies to first, second, and junior trust deeds. But if you commit waste or perpetrate fraud with regard to the residential property (for instance, damage it), your creditor can claim damages from you. This anti-deficiency statute doesn’t apply to debtors that are corporations, the state’s political subdivisions, LLC, or limited partnerships (California Code of Civil Procedure 580e).
Additionally, under California statute, your lender can’t request you to pay any extra compensation, aside from the proceeds from your short sale, in exchange for consenting in writing to the sale. Thus, the creditor cannot request you to give funds or sign a promissory note at the close of escrow as a condition to consent to your short sale (Code of Civil Procedure 580e).
The proceeds from your short sale will repay as much of the loan as possible. In case you have multiple mortgages, all your lenders have to approve your short sale if they agree to take a lower amount than what you owe them. The larger creditor will have already established the criteria for approval of the terms of your sale. Even if your lender is skilled in evaluating short sale-related applications, the approval process could take months from the beginning to the end. If you’re thinking about short selling your house, you should first consult with your lawyer and tax consultant right away to ensure that it’s the right thing to do considering your specific objectives.
How Short Sales Affect Credit
A short sale will hurt your credit score. Contrary to what many people believe, the damage is as extreme as one in foreclosure. Also, you may be incapable of obtaining a new home loan for years. Short-selling your home could reduce your credit score by between 85 and 160 points, as per FICO’s banking analysis. The higher your credit score, the more substantial damage a short sale might cause to it.
Additionally, it’ll take much longer to rebuild your credit. Even though you may take longer to recover fully, it doesn’t mean it will be long before you obtain another mortgage. You could secure another mortgage within two to four years once your score starts to recover. Usually, recovery kicks off after you’re through with your short sale transaction.
Short Sale versus Declaring Bankruptcy, Which Option Is the Best for Debt Relief
Homeowners struggling with repaying their mortgage usually ask what the best option to obtain debt relief will be to pull out from under their loan. Is it a short sale, declaring bankruptcy, or foreclosure? The two most common debt relief options that many homeowners go for are filing bankruptcy and short selling their homes since they’re better than a foreclosure. Bankruptcy and short sale are both useful, but which one is ideal for you will depend on your specific circumstances, including:
If You Are Overwhelmed By Debts
In case your mortgage is the only debt making you go through financial hardships, a short sale is an ideal option for debt relief. But if you have other debts apart from your mortgage, declaring bankruptcy can enable you to manage your medical debt, credit card bills, or any other type of debt. Declaring bankruptcy under Chapter 13 or Chapter 7 makes it possible for you to address all your financial difficulties at once.
If You Have Sufficient Time
The process to short-sell your home takes a substantial amount of time. We have various parties that ought to be included in the negotiations. Even at the end of the process, there isn’t any guarantee that you’ll close the short sale.
On the contrary, filing bankruptcy relieves you from your debt immediately as the automatic stay prevents lenders from coming after you to collect while your Chapter 13 or 7 is open. Typically, a chapter 7 bankruptcy case lasts between four and six months. Thus, it’s a relatively faster debt relief option. Chapter 13 bankruptcy lasts between three and five years. However, during this period, you can cure your delinquent loan payments and pull out of your bankruptcy case, not only up-to-date on your mortgage but also having a majority of your debts eliminated or discharged.
Short Sale Deficiency & Bankruptcy
If you’re thinking about short-selling your home, it is most likely that you have several questions. For instance, what happens if you declare bankruptcy instead of a short sale? How does a short sale differ from a foreclosure? The advantage of going ahead with a short sale after you have decided to declare bankruptcy revolves around the form of bankruptcy you’re planning on declaring.
Short Sale & Bankruptcy under Chapter 7
If you’ve decided to declare bankruptcy under chapter 7 but first want to make a short sale, there’s generally no reason you should proceed with the sale. The reason you are short-selling is so you should relieve yourself from the duty of paying the short sale deficiency when the home is worth less than what you owe or is underwater.
Declaring bankruptcy under chapter 7 allows you the chance to surrender the home to your lender without any continuing responsibility under the loan and no corresponding tax obligation for the debt forgiveness. Essentially, surrendering your house in bankruptcy enables you to simply hand your lender back the keys then walk away, leaving the reason behind the short sale debatable.
The bottom line is, if you’re going to declare bankruptcy under Chapter 7, there’s no reason to pass through the stress of short sale negotiations. But if you live in a place where many houses are severely underwater, and foreclosures are too many, it could be reasonable to short-sell your home and have the title off your name. In case you surrender your home via bankruptcy, your lender still has to foreclose it to remove your responsibility for HOA (Homeowner’s Association) dues.
Short Sale & Bankruptcy under Chapter 13
A short sale before declaring bankruptcy under Chapter 13 is different. Filing bankruptcy under chapter 13 enables you to give your home back to the lender, just like in Chapter 7. However, any outstanding deficiency judgment after a foreclosure is paid off as unsecured debt under the chapter 13 repayment plan.
This means that even though you’re surrendering your house, your creditor still must foreclose it to clear title. That foreclosure leads to the house being sold. In case the sale price is less than what you owe on loan, a deficiency arises. Generally, bankruptcy under chapter 7 eliminates all unsecured debts, deficiency after foreclosure included.
On the contrary, under Chapter 13, you’ll have to pay the deficiency after foreclosure (i.e., the difference between the mortgage amount and foreclosure selling price) as unsecured debt. Since you’ll still be liable to repay some of the unsecured debts you have through your repayment plan, short-selling your home, which slashes the debts before declaring bankruptcy, remains advantageous. Thus, if you can successfully short sell your home before declaring bankruptcy under Chapter 13, you’ll reduce your repayment plan by lowering your unsecured debts.
Why You Have To Involve a Bankruptcy Attorney
The difference between an attorney and realtor when it comes to a short sale is that an attorney both negotiates the sale and offers you legal advice regarding the transaction. An attorney will also help you with the bankruptcy filing. The following are reasons as to why you ought to consult a bankruptcy attorney before your short sale:
A Lawyer Will Help You Understand the Short Sale Agreement
Every short sale document has legal interpretations and consequences. But the terms aren’t clear to a person who has no legal background. You can also easily miss critical information that may later land you in problems. For example, you might assume that the lender’s approval letter forgives your deficiency when, in reality, it doesn’t. Ensure you understand the short sale agreement, so you don’t meet any surprises after you close the sale.
An Attorney Will Assist You In Cutting the Deal
Before you go ahead with a short sale, your creditor must first approve it. Failure to which, they may later go after you to collect the mortgage balance you owe on the home, even after you sell it. Your attorney should help you negotiate with your lender and ensure they consent to your short sale.
You Think the Lender Will Foreclose
If the short sale fails, your lender may move to foreclose. Your skilled attorney will analyze the foreclosure documents then advise you on the different available options if the foreclosure takes place.
During the initial consultation with your lawyer, make a list of all your assets, debts, and liabilities, and gather all your financial records so the lawyer can better understand your financial situation. The short sale process is intricate, and it’s critical to have a lawyer with the best interests at heart working for you.
Is a Short Sale After Declaring Bankruptcy Essential?
Have you declared that you are bankrupt and you now want to short-sell your home? Or has a realtor called to inform you that someone wants to buy your house, but it ought to go through a short sale to close the deal? Before short-selling your house after filing bankruptcy, read the following to gain the reality of your situation.
After Declaring Bankruptcy, You’re Not Responsible for Your Mortgage Loan
If you filed bankruptcy and your debts were discharged, you aren’t liable for any deficiency that results from your home loan. In case your lender forecloses your home after you file for bankruptcy, they can’t come after you asking for the balance. If the creditor repossesses the home, it’s their problem to solve. You could sign off on a deed returning home after bankruptcy, but it’s up to your creditor to look for you.
HOA Could Alter the Game
As per the bankruptcy law, HOA charges that usually emerge after declaring bankruptcy are not discharged. Simply put, the meter still runs for the HOA costs that emerge starting from the time you declare bankruptcy until the time the home isn’t under you. In case you surrender your house in bankruptcy, you’ll theoretically pay much more money once the bankruptcy is over.
Usually, the HOA costs that accrue between your bankruptcy declaration and the foreclosure sale won’t affect you. For your lender to resell the house, they should first pay off its debt, including HOA charges; otherwise, nobody will buy it.
Short Sale Once You Have Filed Bankruptcy Isn’t Necessary
You’ll be asked to sign a contract during the sale of your house, which you’ll have to present to the bank. The bank will review the contract and obtain the home’s appraisals. If you’re engaging a workout professional, you’ll probably spend cash to close your deal. Thus, you won’t benefit from the sale. The only parties that win if you short-sell your house after declaring bankruptcy include:
The workout consultant and buyer who buy the property more affordably than it ought to be
Realtors that make commission once they sell your house
So what happens if there’s foreclosure after bankruptcy filing? You’ll have to relocate. Additionally, until your lender seizes the home’s title, you’ll have to stay up-to-date on taxes and insurance.
Contact a Los Angeles Bankruptcy Attorney Near Me
There’s no single correct solution to these financial troubles that is ideal for everyone. Your specific objectives might make a bankruptcy or short sale a bad or good idea, and they could make a foreclosure a poor or viable option. At the Los Angeles Divorce Lawyer, we can use our extensive experience and knowledge to assess your specific financial situation and advise on bankruptcy, short sale, and foreclosure, depending on the precise circumstances and facts. To schedule your consultation, please call us at 424-285-5525 right away.