What Are the Dangers of Short Sale After Bankruptcy?

Short sales can help reduce your liability.

As long as your house is titled in your name, you can be held liable for homeowners association dues, as well as damages if someone harms themselves on your property. A short sale takes you off your house's title. The dangers associated with short selling your property after filing bankruptcy vary based on where you are in your case and whether you reaffirmed your mortgage.

Short Sale

If you sell a home for a price short of what you owe, and your mortgage lender approves that sale, you have just conducted a short sale. Short sales typically are considered a means of avoiding foreclosure. You generally must hire a real estate agent to find your home a buyer. A deed-in-lieu is another option. It also requires your lender's approval, but, instead of hiring a real estate agent to find a buyer, you simply deed the house over to your lender and are done with it.

Waste

One of the greatest dangers associated with doing a short sale after bankruptcy is that you waste time and energy. Bankruptcy gives you the option to walk away from your house free from personal liability for your mortgage debt. Accordingly, except for wanting to speed up the process of getting your name off the title, there's no logical reason for conducting a short sale after your bankruptcy.

Deficiency

If you reaffirmed your mortgage during bankruptcy and have now, after your discharge, decided to do a short sale, you may get stuck with a deficiency judgment. Reaffirming the mortgage means excusing it from the bankruptcy and maintaining full liability for it. None of bankruptcy's protections apply to a loan you reaffirmed. So, if you short sell your house, the remaining balance, called a deficiency, could still be your responsibility if your mortgage company doesn't agree to forgive it. Note that you will not be responsible for the deficiency if you did not reaffirm your mortgage during your bankruptcy.

Taxes

If your mortgage company forgives the balance due on your loan after the short sale, you may have to pay taxes on it. The Internal Revenue Service generally treats forgiven debt as taxable income. However, according to the IRS, you may be able to exclude the forgiven amount if it meets certain criteria, such as being forgiven on your principal residence between the years of 2007 and 2012. Note, that if you didn't reaffirm the debt, you generally will not be taxed on the amount your lender writes off, regardless of whether you meet the criteria.

References

• Internal Revenue Service: The Mortgage Forgiveness Debt Relief Act and Debt Cancellation