What Happens to a Property Short Sale After a Bankruptcy?
The short sale of a property is an agreement that is reached between the owner and the lender as an alternative to foreclosure. In these cases the agreement is that the property will be sold to a new owner and the current mortgage settled for less than the balance. In the event that the seller declares bankruptcy during the short-sale process, that can change the terms of the short-sale arrangement.
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Short Sale Agreement
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When a homeowner can no longer afford to pay her mortgage and does not appear able to resume regular monthly payments at any time in the near future, one alternative she can try is using a short sale. With a short-sale agreement, a homeowner is allowed to remain in the home without making payments while having the home is listed with a real estate broker as for sale. Lenders will typically allow a seller at least six months to complete a short sale.
Bankruptcy and Foreclosure
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When a homeowner files either a Chapter 13 or Chapter 7 bankruptcy when his home is in danger of foreclosure, the bankruptcy puts an automatic stay on foreclosure proceedings until after the bankruptcy hearing. This means that during the time between the bankruptcy filing and the court hearing, the lender cannot move forward with any collection activity or foreclosure proceedings. The same is true with a short sale.
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Bankruptcy and Short Sale
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Even with a pending bankruptcy, the home can still be shown and listed for sale either as a short sale or a normal retail transaction. The lender does have the option of canceling the short-sale agreement. However, if the seller is successful in obtaining a new buyer for the property while the bankruptcy is pending and the bank is going to be able to collect on the majority of what is owed, the bank is likely to take that as a settlement in lieu of foreclosure.
Subsequent Effects
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With a traditional short sale, a lender does have an option of filing a deficiency judgment for the remaining balance of the mortgage after a sale is completed. However, if the homeowner declares bankruptcy prior to that point, no deficiency judgment can be pursed whether the home was sold as a short sale or after market as a foreclosure. In this regard, a bankruptcy can best protect the seller's interest.
Another Option
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The time between the bankruptcy filing and the court hearing can allow the seller to liquidate or borrow enough funds to clear the deficiency. If the seller is able to produce delinquent payments, late fees and interest, or obtain a new loan for the property, the short sale is automatically canceled and the loan reinstated. Since the time frame between a filing and court hearing is typically 90 days, it can be enough time for some owners to find this a viable solution.
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References
- Photo Credit Bankrupt. Businessman with empty pockets (with clipping paths) . image by Vitaliy Pakhnyushchyy from Fotolia.com
