attorney

Many of my Short Sale clients in San Diego inquire about bankruptcy vs. short sale and which is best to pursue. I’ve gotten the question so many times I referred to  Jeff Styers, one of the leading Bankruptcy Attorneys in San Diego, to help clarify and answer the question.  Feel free to contact me for more information about short sales and how one would work in your specific situation.

Bankruptcy and Short Sales

In the current economic environment, the issues of bankruptcy and short sales are prevalent.  The following information may assist in understanding some of the issues which arise in this context.

BANKRUPTCY: There are two main choices in bankruptcy: Chapter 7 or Chapter 13.

CHAPTER 7: This is the most popular choice in the Bankruptcy Court, as it allows a person to “discharge” (wipe out) consumer debts such as mortgage debt, credit card debt, medical bills and business debts, such as rental property mortgages.  YOU HAVE TO QUALIFY FOR CHAPTER 7 BANKRUPTCY.  QUALIFICATION IS BASED ON YOUR INCOME AND HOW MUCH SECURED DEBT YOU OWE.

CHAPTER 13: This type of bankruptcy is a payment plan that lasts for 3 to 5 years.  It allows a person to pay an affordable monthly payment to satisfy their creditors.  Certain debts do not have to paid in full.  IT IS CURRENTLY THE ONLY BANKRUPTCY WHICH ALLOWS A PERSON TO STRIP OFF (ELIMINATE) AN UNSECURED SECOND OR THIRD MORTGAGE DEBT.

SHORT SALE: This is a procedure where a person sells their house for less that they owe on the mortgage debt.  It requires that the seller’s mortgage company(s) agrees to take less than full payment.  It normally results in a tax liability arising from the “forgiveness of debt” by the mortgage lender (However, a Federal Law which will expire at the end of 2012, eliminates this type of tax, if the forgiven debt is under $2,000,000 and the mortgage debt is a “purchase money” or “home improvement loan” on a personal residence.  NOTE: California tax law limits the amount of qualifying debt to $800,000).  A short sale will cause damage to your credit report and credit score, because the debt is thereafter listed as being “satisfied by less than full payment”.

OK…YOU HAVE THE BASICS…HERE’S HOW IT ALL COMES TOGETHER:

If you are contemplating a short sale and may also need to file bankruptcy, it is almost always a good idea to not complete the short sale prior to filing for bankruptcy.  Why?  Because, the short sale may create a tax liability (which cannot be discharged in bankruptcy) and, by eliminating the secured debt (which you do by the short sale) you make it less likely that you will qualify for bankruptcy (at least Chapter 7).