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Many people think that a short sale might be their only choice when facing serious debt and difficulties paying the mortgage. However, there are many pitfalls involved with short sales, and there might be better options available.
Our lawyers at USADebt have a wealth of experience to help our clients understand all of their options, including how a short sale of real estate works and whether it is the right choice. Our team of attorneys includes board-certified consumer bankruptcy specialists.
A short sale is a real estate transaction in which the proceeds from the sale fall short of the outstanding mortgage balance on a property. In simpler terms, it occurs when a homeowner sells their property for less than the amount they owe on the mortgage. The lender agrees to the sale, even though the proceeds won’t fully cover the outstanding loan.
Here’s a step-by-step breakdown of how a short sale typically works:
Financial Hardship: The homeowner experiences financial hardship, making it challenging to continue making mortgage payments. This hardship could result from job loss, medical expenses, divorce, or other financial setbacks.
Negotiation with Lender: The homeowner contacts the lender and discusses the possibility of a short sale. The homeowner provides documentation of their financial hardship and evidence that the property’s market value has decreased.
Real Estate Agent Involvement: The homeowner usually works with a real estate agent experienced in short sales. The agent helps list the property, find a buyer, and negotiate with the lender on behalf of the homeowner.
Buyer Offer: A potential buyer makes an offer on the property. This offer is typically less than the amount owed on the mortgage.
Lender Approval: The homeowner’s lender reviews the buyer’s offer and, if satisfied, agrees to the short sale. Lenders may forgive the remaining debt (the deficiency) or, in some cases, may seek repayment through a promissory note.
Closing the Sale: Once the lender approves the short sale, the transaction proceeds like a traditional real estate sale. The property is transferred to the buyer, and the proceeds are used to satisfy the outstanding mortgage partially.
Financial Hardship: The homeowner experiences financial hardship, making it challenging to continue making mortgage payments. This hardship could result from job loss, medical expenses, divorce, or other financial setbacks.
Negotiation with Lender: The homeowner contacts the lender and discusses the possibility of a short sale. The homeowner provides documentation of their financial hardship and evidence that the property’s market value has decreased.
Real Estate Agent Involvement: The homeowner usually works with a real estate agent experienced in short sales. The agent helps list the property, find a buyer, and negotiate with the lender on behalf of the homeowner.
Buyer Offer: A potential buyer makes an offer on the property. This offer is typically less than the amount owed on the mortgage.
Lender Approval: The homeowner’s lender reviews the buyer’s offer and, if satisfied, agrees to the short sale. Lenders may forgive the remaining debt (the deficiency) or, in some cases, may seek repayment through a promissory note.
Closing the Sale: Once the lender approves the short sale, the transaction proceeds like a traditional real estate sale. The property is transferred to the buyer, and the proceeds are used to satisfy the outstanding mortgage partially.
Short sales are often pursued as an alternative to foreclosure, as they can be less damaging to the homeowner’s credit. However, they require approval from the lender, and the process can be complex.
Here are detailed explanations of some alternatives to a short sale:
Chapter 7 bankruptcy, often referred to as “liquidation” bankruptcy, allows individuals to discharge qualifying unsecured debts. It involves the liquidation of non-exempt assets to satisfy creditors.
This option provides a fresh start by wiping out certain debts entirely. In many cases, individuals can keep essential assets through exemptions.
Chapter 13 bankruptcy is a reorganization plan where individuals with a regular income create a structured repayment plan to address their debts over three to five years.
It allows individuals to retain their property while catching up on missed payments. It’s particularly useful for those with a stable income seeking to avoid a short sale.
Negotiating with creditors for debt settlement involves reaching an agreement to pay less than the total amount owed, often in a lump sum or structured payments.
This approach can result in reduced debt amounts, providing relief without the need for a short sale. It is particularly useful for unsecured debts.
Loan modification involves negotiating with your lender to modify the terms of your mortgage, such as interest rates or the loan term, to make it more manageable.
It allows homeowners to keep their property while making the mortgage more affordable. It’s a suitable option for those facing temporary financial hardship.
A forbearance agreement is a temporary arrangement with the lender that allows homeowners to reduce or suspend mortgage payments for a defined period.
It provides short-term relief, making it suitable for those experiencing temporary financial difficulties and aiming to avoid a short sale.
Some companies offer a “sell and rent back” option where homeowners sell their property to an investor and then rent it back.
This allows individuals to access equity without moving, but it’s essential to carefully review the terms and potential drawbacks.
Refinancing involves replacing an existing mortgage with a new one, often with more favorable terms.
It can lower monthly payments or adjust the loan term, providing relief for homeowners facing financial challenges.
When considering alternatives to a short sale, it’s important to consult with our bankruptcy attorneys, or other professionals to assess the best strategy based on individual circumstances. Each option has its merits and considerations, and a tailored approach is key to achieving the most favorable outcome for the individual’s financial well-being.
A short sale is when a mortgage company gives a homeowner permission to sell the house at a reduced price, without paying the full amount owed. While it sounds like a preferable arrangement, especially for those facing foreclosure, short sales can actually be highly complex and troublesome for the homeowner.
Some of the pitfalls of short sales include:
For these and other similar reasons, many people find that bankruptcy is the better option for mortgage debt relief.
As per Statista’s data, Michigan witnessed a decline in business bankruptcy filings in 2022, with 220 cases reported. [1]
Bankruptcy is a court procedure that either cancels most debt completely chapter 7, or reorganizes it into a creditor repayment plan chapter 13. Either chapter of bankruptcy places an automatic stay or injunction on all creditor actions, including foreclosure. Whether you actually keep your house depends on your financial situation and the chapter of bankruptcy you file.
Chapter 7 cancels debt and generally results in debtors giving up their house if the debtor cannot make the payments and wants to cancel the debt. In other cases, a Chapter 7 debtor may keep the house and reaffirm the debt or seek to modify the loan with the lender. If the home is surrendered, the debt is canceled. This allows the debtors to walk away from the payments without the negative repercussions of a short sale.
In a Chapter 13, debtors consolidate debt into a single affordable payment. The reorganization often reduces debt enough that the debtor can afford the mortgage on the house and can make up past due payments. Debtors can keep their home so long as they continue to make the payments to the Chapter 13 plan.
Handling bankruptcy requires a good grasp of the law, and at USADebt, we’re here to make it simpler as youradvocates for financial relief.
Why our help matters:
Choosing a legal partner with know-how in bankruptcy is key to a successful financial recovery. At our law firm, we’re committed to excellence, and our deep understanding of bankruptcy law makes us reliable partners on your journey to a better financial future.
Yes, you can. A short sale is a viable option for homeowners facing financial challenges, and it can be explored both independently and in conjunction with bankruptcy. It’s important to consult with our bankruptcy law firm to understand how a short sale aligns with your overall financial strategy.
A short sale can impact your bankruptcy proceedings, especially if it involves the sale of assets. The sale proceeds and any deficiency balance may need to be addressed within the bankruptcy framework. Coordination between your real estate agent and bankruptcy attorney is essential for a seamless process.
In most cases, a short sale may not eliminate all mortgage debt. While the sale proceeds are used to pay off a portion of the mortgage, there may be a remaining balance, known as a deficiency. The treatment of this deficiency in bankruptcy depends on the specific circumstances and applicable laws.
Yes, it’s possible. However, initiating a short sale during an active bankruptcy requires court approval. We can guide you through the process, ensuring compliance with bankruptcy laws and court procedures.
Yes, a short sale can impact your credit score, but typically less severely than a foreclosure. While both involve the sale of the property for less than the outstanding mortgage, a short sale is generally considered less damaging to credit. The extent of the impact depends on individual credit history and the reporting practices of creditors.
Negotiating a short sale with your lender after filing for bankruptcy is possible but requires careful consideration. It involves collaboration between your bankruptcy attorney and real estate agent. The terms of the short sale need to align with bankruptcy laws, and any proceeds should be handled within the bankruptcy proceedings.