You filed for bankruptcy and now are contemplating a short sale.
Maybe you got a phone call or a letter from some “workout consultant” who “specializes” in these sorts of things.
Perhaps a real estate broker called to let you know someone wanted to buy your house but it would need to go through a short sale in order to make the deal happen.
Before you agree to a short sale after bankruptcy, let’s take a step back and inject a little bit of reality into the situation.
After Bankruptcy, You’re Not Liable On The Mortgage
You went through bankruptcy and got your discharge. You’re no longer personally liable for the balance due on the mortgage. If the house goes into foreclosure after bankruptcy the bank can’t come after you for the deficiency.
There’s no further negative credit stigma because your debt has been discharged already.
If the bank takes back the house, it’s their problem – not yours. You can certainly sign off on a deed giving back the property after bankruptcy, but it’s up to the bank to come to you. This is a matter of convenience, not obligation.
Homeowner’s Association? That Changes The Game (Maybe)
Under Section 523(a)(16) of the bankruptcy law, homeowners association fees that arise after the bankruptcy case is filed are not discharged. That means that all HOA fees that arise from the date of the bankruptcy filing until the day the condo leaves your name, the meter is running.
If you’re giving up your condominium in bankruptcy, you’re theoretically looking at a very costly post-bankruptcy bill. The short sale specialists want you to believe that the pipe is going to come calling – but will he?
In most cases, the HOA fees that accrue between the bankruptcy filing and the foreclosure sale aren’t going to make a difference to you. In order to sell the property, the mortgage bank is going to need to pay off all debts on the property – include those pesky HOA fees. A failure to do so means that nobody’s buying the property.
When the lender pays off the HOA fees after bankruptcy, that gets added to the amount of money you owe the mortgage company. The debts to the lender were discharged in your bankruptcy.
Once again, this is the lender’s problem after bankruptcy – not yours.
Getting a short sale done after bankruptcy Is A Headache
You’re going to need to enter into a contract of sale for the property (I’m betting that real estate broker has one ready for you to sign, surprise surprise). Then you need to get it over to the right people at the bank (good luck with that). They’ve got to review it, get appraisals of the property, and make you jump through a bunch of hoops.
If you’re working with a workout consultant, you’re probably going to have to spend some money to get the deal done, too.
So you’re going out of pocket and out of time. And you get nothing out of it.
The only people who win when you do a short sale after bankruptcy are the real estate broker (who makes a commission on sale of the property), the workout consultant, and the buyer (who gets the property at a lower price than would be possible without a short sale).
Notice the person missing from this scenario? Yup, it’s you. No benefit whatsoever. Of course, this presupposes that you don’t want your friend or relative to get a sweet deal on a house – but that’s another ball of wax and doesn’t involve these players.
So what happens if there’s a foreclosure after bankruptcy?
Eventually you’ll have to move out. And until the bank takes title to the property you’ll want to keep current on the taxes and insurance. But aside from that, pretty much nothing.
Why would you possibly consider a short sale after bankruptcy? What’s the point? For the most part, there is none. Short sales after bankruptcy are a waste of your time and your energy except in limited situations.
Image credit: certifiable.nl
Wow!
The things that you don’t think about as a consumer…
After reading this post, I called two people that had gone through a short sale after bankruptcy and they had never even thought about why they went through the hassle of helping everyone else make some money off of their efforts…
They both said that they thought that they had to help so that they would not be exposed o any further liability…
I guess they did not fully comprehend the “discharge” function of bankruptcy…
For me personally, I may have helped out, but someone would have had to pay me some money or everybody would have been SOL…
Wow! The things that y don’t think about and just blindly go along with…
Nothing wrong with being nice and helping out a new potential buyer, Kenneth; it just kills me that outside professionals don’t realize how it works. Not saying that those who help the process along (brokers and the like) are trying to screw anyone, though; the new buyer wants the property and the existing owner is the primary point of contact. I just wish someone would consider compensating the owner for his or her time and efforts.
I certainly agree that short selling after bankruptcy is not a benefit to the seller. You forgot to mention potential liability to the buyer as in any real estate sale for whatever reason the buyer and agents involved want to sue you (no bk discharge available to you!). A couple of other points: 1. The HO fees lien is wiped out by the foreclosure in California so it does not need to be paid by the bank after Trustee’s Sale but it remains the seller’s liability for post bankruptcy HO fees and must be paid for lien to be released and short sale done. 2. Property taxes in CA are never a personal liability of the property owner so need not be paid by the seller post bankruptcy and insurance is included in HO fees (except liability which is optional, cheap and recommended). Finally, the incentive seems to be delay and some money from the bank because of a government program to reduce foreclosures (other than to avoid liability for the mortgage deficiency that people still believe they will owe because they can’t believe the agents would lie about that and not to have a foreclosure in their credit report because they were told that means never buying a house again).
Thanks for the California perspective, Tony. This article was designed for the seller as opposed to the buyer, but clearly this shows the value of good representation for the buyer at closing.
In CA (and any other state in which an HOA lien gets in line behind everyone else) a short sale makes sense if the Debtor does not want to stay in the property and, therefore, does not want to continue paying the HOA. This is because, in the absence of a short sale, the bank will foreclose on the property and the HOA will NOT receive anything. Perhaps NY is different, but in CA, an HOA lien gets in line behind everyone else and typically will receive nothing in the event of a foreclosure. Moreover, at least in my experience, HOAs have become very aggressive about collection making this a real issue for many of my clients.
The overlooked issue is what happens when you do not want to stay in the property. If you are staying there, then wait until they kick you out. Pay the insurance, taxes and dues and save the rest.
However, if you have left or want to leave, then a short sale may seem like a good idea AS LONG AS YOU DO NOT PAY ANYTHING TO DO IT. Think about it, the post-petition taxes and dues liability goes away. The maintenance liability from the local government (those pesky ordinances) goes away. The liability from potential injury goes away. The house is no longer in your name and nothing more can happen based on that house.
While it is a rare case, getting the house transferred to someone else fast can be a good thing. A short sale can do that.
Sure, if it doesn’t cost you anything then do it. Problem is that such is rarely the case.
I have seen the debtors pay money to close a short sale because they think it will help their credit or lower their liability. The advantage to a short sale is mostly emotional. A lot of debtors feel bad because they are losing their home. They feel that a short sale somehow shows that they tried to do better than people who just walk away or lose their home in a foreclosure sale. This is a shame that these people think that way. Debtors still drive General Motor cars and eat Twinkies and Hostess Cupcakes even though those companies and many others filed bankruptcy and the companies are still around. If a business files a bankruptcy, it is called smart financial planning. The company has determined that it cannot survive if it continues to operate as it is presently operating. If a person files, they think that they are worthless or not as good as other people.
Businesses use bankruptcy to get on with the business of making money. Too many people think filing bankruptcy is the end. I ask people who come in to file are they happy with the life they have now. The answer is always no. Most have no plan as to how move forward to where they want to go in life. For those without a plan, there is usually no “fresh start.”
Maybe a part of bankruptcy filing should be visiting and being tested by a vocational specialist so that the debtor can see how their skills can be used in the market place.
Great insight and advice Jay. I find myself explaining this time and again. Now I have a link to direct people to so they know it’s not just me
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I guess with the overwhelming communication from realtors our voices get overshadowed.
I have modestly claimed “Faucher’s Law” among my southern California colleagues: “A short sale never helps a client about to go into bankruptcy anyway.” I now realize that it should be expanded to include clients who have gotten their discharge. Thanks for the post; it directs our attention to the real-world results of our labors, and how the benefits can be wasted if the client is not careful.
“In order to sell the property, the mortgage bank is going to need to pay off all debts on the property – include those pesky HOA fees. A failure to do so means that nobody’s buying the property.”
I am not sure if the HOA (at least in NY unless the Condo has taken certain steps after the delinquency) are a lien on the property. If they are not a lien, is there any requirement that the Bank or any other forecloser pay off these debts – as I am not sure if they are “debts on the property”?
Lew, if the bank doesn’t pay the HOA then the title company won’t let the sale go through. It’s a cloud on title, and no title company would except it.
The worst phone call you can receive as a bankruptcy attorney is your client on the other line, telling you that their HOA just began garnishment for several thousand dollars. That’s right, their bank didn’t foreclose for months and they owe the HOA thousands of dollars and to make matters worse, the house still has not been foreclosed on and they need to continue to pay on the monthly amount until it does.
Of course, I advise my clients to stay in their house but it doesn’t always work out that way. Ttey didn’t because the house was too far from work to begin with, they needed to move closer into town to cut down on gas and they wanted to move into a new school district and not have the kids get to attached to the neighborhood. They all have their reasons for moving and it is always to make their lives easier. Foreclosures don’t always come when you want them and sometimes they just never come. So, they moved and they didn’t pay, the HOA planted a tree, seeded their lawn and fined them $35.00 a day for leaving their garbage can out for a month and within 8 months of filing bankruptcy, they are facing a lawsuit for well over $5,000.00. This situation happens a lot here in Arizona. So, I do advise my clients to short sell their house which ensures that they are no longer titled to a house, responsible for the taxes, insurance and HOA and they know exactly when it will sell and are not hoping that the bank will be kind enough to sell it for them. And guess what, my short sale clients never call me and tell me that the HOA is garnishing them, ever.
So, if your only logic in not selling your house is it is a hassle and someone is going to make money on you, then figure out what a hassle it will be for you maintain it, insure it and pay the taxes on it while you wait for the bank to foreclose on it.
That’s a good point, and underscores the difference between where I practice and the rest of the nation. Here the banks will foreclose and the condo will wait in line, knowing that the bank is a better bet for payment than the owner.
What if they get $10-30K from the lender to complete the short sale? Debt free and money to start over? Might be worth the hassle. Oh, and yes, I’ve been at closings where Chase has done that.
Majdel, that makes it well worth the effort on the part of the homeowner.
I was offered 7k to complete a short sale. I did bankruptcy in 2009 and thought it was over. The messages above help me clear my mind. I was offered 20k just the other day. Should I let the two offers compete and take the highest one. Is there any reason to bring a lawyer to a short sale when the buyer has everything set up already? I have limited time to get the answers because I was asked to sign the deal on Monday afternoon.
Leigh, I’m not in a position to counsel you based on a comment on a blog. I think, however, that having a lawyer is the right way to go in this situation. Good luck!
Jay,
My understanding is that a foreclosure after a BK discharge can, and will, be reported on your credit bureau. Even though you are no longer personally responsible for the debt, you are still responsible for the lien. A foreclosure, BK or not, will stay on your credit for seven years whereas a short sale will have less impact and only be on your credit for two to three years, making it easier to qualify for a new mortgage. Can you please advise?
Laura, I don’t know that to be the case. Adverse credit information uniformly regardless of WHAT that information is.
My wife and I are in a situation that is probably becoming more common. Our Chp 7 BK was discharged March 16, 2010. First mortgage and second (HELOC) were discharged. Haven’t made payment on either since, but, we’re still in the house nearly 2 years later (though, we did move out for a year and rented, practically begged the bank to foreclose, stayed current on HOAs, and, since the bank wasn’t taking action, we recently moved back in). Now, we received a NOD dated Jan 9, 2012 so the clock is now ticking. Here is our dilemma; in March/April, we should be able to qualify for FHA loan (2 years post-BK, plus we have re-established with credit scores of 682 and 708, respectively). We’re thinking about buying because prices are pretty good right now (we are in Orange County, CA). But, will we be denied because our name is still on the title of a property that is in default and will be foreclosed (meaning that we have to wait another 3 years to qualify for FHA)? And, If the answer is yes, will a short sale change this? On the other hand, and maybe more importantly, if we were to enter into a short sale agreement, will we be required to re-obligate ourselves to the first and second?
Tim, I can’t tell you what underwriting standards will bear out with a new loan application. This would be a good time to speak with your lawyer as well as your mortgage lender or broker.
It is my understanding that in California a Chapt 7 does not discharge any mortgages against a homeowner’s property,i.e., the homeowner/borrower is still liable for the loan(s). Therefore a short sale makes perfect sense along with the fact that many homeowners can get paid by the bank to do a short sale.
A Chapter 7 bankruptcy discharges personal liability on those debts that can be discharged; unless the mortgage was reaffirmed or otherwise excepted from the discharge by the court, the personal liability of the filing debtor is extinguished at the time of discharge.
I was just called by a Realtor with a similar proposition. My property was included in my bankruptcy discharge. The bank is offering me $2500 to short sell rather than having them foreclose. If I go through with this, will I owe the bankruptcy trustee the $2500?
Thanks
If the bankruptcy has been discharged, the property abandoned and the case closed, any new income is outside the reach of the court. You should speak with your lawyer to ensure that the property has been abandoned and the case closed prior to making any move on the property, though.
Are there tax implications for completing a shortsale on an income property even if the property was discharged through bankruptcy? The bank mailed me a 1099 recently.