With the real estate market in a slump and a slow economic recovery in front of us, many people are dealing with homes worth far less than what they owe. The difficulty comes when they are put in a position of having to sell. What do they do? How do they get out from under? The answer depends on the situation that is driving the need to sell the home.
If you have a great credit score and can afford the mortgage payment going forward but have to sell based on business or family relocation or some other reason that precludes waiting for the market to recover, a short sale could make sense to avoid foreclosure and limit its negative effect on your credit.
How to Decide If a Short Sale is Worth It
On the other hand, if you are behind on the mortgage, cannot afford the monthly payment going forward, and have a significant amount of other debt that generally makes you insolvent, you have to ask yourself this question: who am I really helping with a short sale, me or the mortgage company?
Is it worth all of the time and aggravation, especially if more than one mortgage is held by more than one bank? Think about the following:
- If you have personal mortgage insurance (PMI) on the property, you are not necessarily "doing the right thing" by the mortgage company. If the property goes to foreclosure sale and does not bring enough to cover the balance due, they can make a claim for the difference against the carrier to get paid. You are also not necessarily helping yourself. I had a client walk away from a short sale because the PMI carrier would not let the short sale go through unless the sellers signed a note for the $35,000 shortfall!
- You may still owe the bank money after a short sale. If you short sell the property, the home may go to someone else, but the bank may pursue you for the difference!
- You may owe more taxes than you expect. Even if the bank does not expect you to pay the shortfall, the shortfall "forgiven" will be considered income by the IRS, and you will face a tax bill if the property being sold is not your principal residence or you are selling your residence after December 31, 2012.
- Your credit score may go down. Your credit score may still be negatively affected because the mortgage was not paid off in full, whether by foreclosure or short sale or even if you turn over the title to your home to the mortgage company to avoid foreclosure.
Bankruptcy as an Alternative
You need to look at the bigger picture. Do you want to short sell your home, face one or more of the risks listed above, and still not have a solution to your other mounting debt? Of course not! You must look at what is best for you, not the mortgage company!
One solution is to file bankruptcy. Why?
- If you cannot afford the home anymore, you can walk away from it with no responsibility for the shortfall to the bank.
- There will be no tax bill for the "debt forgiveness income" of the shortfall as the IRS makes an exception in the case of bankruptcy.
- If you are simply behind on the mortgage but can afford the monthly payments going forward, a Chapter 13 bankruptcy may give you a chance at a repayment plan that will bring you current over the next three to five years and wipe out your credit card and other unsecured debt to the extent it interferes with your ability to make an extra payment every month to the mortgage company to accomplish this.
- You are addressing all of your financial problems, not just the mortgage.
The downside is that bankruptcy may have a much more significant effect on your FICO score than a foreclosure because it results in non-payment of all your debts, not just one. However, if, after consulting with a New Jersey debt relief attorney, bankruptcy is what is best for you, this should not stand in your way. File bankruptcy and get a fresh start.
