Short Sale vs. Foreclosure

A lot of our clients aren't sure what the effects of losing their real property are. There are several schools of thought. I will only (attempt) to address the differences as they pertain to bankruptcy.

Warning: gross generalization and simplification ahead

If you choose to short sale your house it would look like this. First you would list your home with a qualified agent. This agent would get the banks permission to do a short sale. They would then gather several (hopefully) offers and submit them to the bank. The highest one wins and the bank would approve. What it means for you is that you would stay in your home until ownership transferred to the party that bought it. They may even work out a way that you could rent it back for a period of time giving you enough time to get moved --it's up to the new owner though.

Once it's not in your name any more then the messy part begins. First, they say that a short sale looks better on your credit. This makes no real difference though if you are going to have to file bankruptcy to keep away from the down side of the short sale. This downside comes in the form of a 1099. You see, as far as the Government is concerned, when one party recognizes a loss (your old mortgagee) then someone else must recognize a gain (sadly, this is you). You realized no actual financial gain in the short sale. The only people who made any money in the short sale was the agent who helped you with the short sale, escrow and title maybe too. BUT what you did gain is the "forgiveness" of a chunk of money. Well, you have to pay taxes on that money. You will get a 1099 and be required to pay taxes on that amount. It's ugly. (Check with you CPA to get the hard facts on this subject.) That is when you may want to consider filing a bankruptcy to prove your insolvent and unable to pay that debt. A bankruptcy stays on your credit report for up to 10 years, so it is important to rebuild as soon as you are able to.

Okay, now there is foreclosure. No, this does not look good on your credit report. But if your credit is already not great (and if you are at the point of foreclosure trust me that it does not look great) then an easy way to walk away from the property would be to file a bankruptcy and walk away clean. This really is the easiest solution to not being attached to your property any longer. There are no 1099's a, minimal mess and no deficiencies. Wait, I take that back, you would be responsible for any HOA dues that accumulate between the date of filing and the date of foreclosure when the property goes into the banks name and our of yours --the only deficiency. As for credit, the foreclosure will be on there as well as the bankruptcy. Again, the bankruptcy is on there for up to 10 years.

Obviously, neither of these options are ideal. The best plan of action is to educate yourself. Speak to a licensed Broker for information on short sale and also to a bankruptcy attorney for that side of the information. It never hurts to be really educated when making a decision.

Steven J. Diamond graduated from John Marshall Law School in 1992 and has since dedicated his practice to protecting consumers and their rights. He resides in San Diego with his wife, three kids, two dogs and one cat. Steven is also heavily involved with Ramona Pony Baseball. He is a Travel baseball coach and National Travel Baseball Advisor.

Copyright Chang & Diamond, APC
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.

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