By now the word short sale is as a common of a phrase in the English lexicon as the word “google it.” Almost all homeowners know that if they need to sell their home, and their house is unfortunately “underwater,” then they can seek approval from the bank to allow them to sell their home for less than what they owe on their mortgage. That is what a short sale is. The “sales pitch” is usually that you can avoid bankruptcy and preserve your credit score.
So, what sort of problems have people been running into when trying to do a short sale on their home?
- The banks simply refuse to work with them. Beyond the ton of anecdotal evidence that exists out there, I have had countless bankruptcy clients of mine report the same thing: Short sales, just like a loan modification, are extremely hard to come by. You line up a potential buyer, you submit paper work to the bank countless times, and months later, after many hours of negotiations with the bank, they deny the short sale.
- You want to do the right thing, but the bank still sues you. Far worse than the problem of the bank not accepting the short sale as an alternative to foreclosure, is the fact that many folks out there fall into a false sense of security thinking that once they have completed the short sale that the worst is behind them. They think they can move on with their lives. But many times the bank will say, not so fast, we want a bunch of money from you now as well or we will be seeking a “deficiency judgment” against you. In other words, what the bank is saying is thank you for the hard work in helping us find a buyer for your home, but you still owe us –for example- $40,000! If you had a home equity line (HELOC) in addition to your mortgage, it is almost a matter of certainly that you will be getting sued. The CNN Money article You Lost Your House But You Still Have to Pay does a great job of explaining this issue.
- Your credit score takes a serious beating. You would think that by doing a short sale instead of a foreclosure that you would be rewarded with a higher credit score. Well, not so. The Washington Post article titled Short Sellers May Take a Big Hit On Their Credit Scores reveals that your credit score is pretty severely damaged even if you manage to complete a short sale.
So, what are the advantages of filing for bankruptcy once you realize that the writing is on the wall and you need to let go of the house? Why file for bankruptcy now instead of later?
- You can have a solid credit score within 3 years of obtaining a bankruptcy discharge. Hard to believe, but once your credit score has taken a nose dive, nothing will get you to a good credit score faster than a bankruptcy discharge. Having zero debt reported on your credit report –which is what a bankruptcy discharge will do for you- will do wonders for your credit score. It is that whole debt to income ratio that you may have heard about. And since most people thinking about doing a short sale on their home no longer have a pristine credit score, the bankruptcy will certainly not ruin your credit at this point.
- You can avoid having to ruin your credit once again. The banks can sue you years after the short sale has taken place, just when you have a respectable credit score once again. You may be able to still file for bankruptcy, but now you will have to ruin your credit score once again.
- You can save yourself lots of money. I do not care who your attorney is. Here in Virginia, usually there is not much a defense to a “deficiency judgment” suit brought by the original bank who lent you the money. Typically you end up settling with the bank, assuming you have the means to do so, and that means paying them thousands of dollars.
- Once you come to the realization that you may need bankruptcy relief after all, you may no longer be eligible for a chapter 7 discharge. Typically, when people are thinking about doing a short sale in lieu of walking away from the home, is at a time of a job loss, divorce, or the like. It is at a time when they would typically qualify for a chapter 7 discharge. But, nearly 4 years later, when the bank/HELOC files that lawsuit, you have typically bounced back, have a good paying job, and regretfully, may no longer qualify for a chapter 7 bankruptcy.
Having taken all this into account, if you are still adamant about doing a short sale, then at least hire an attorney. A lawyer, unlike a realtor, is typically far more equipped at negotiation with the bank and obtaining a release from personal liability on your behalf.
And if the bank will not waive your personal liability in writing, and your credit score is still taking a beating, than what is the point of a short sale?!