Which Should I Do: Short Sale or Bankruptcy?
When you are unable to meet your financial obligations, two options to consider are a short sale and bankruptcy. The short sale is a solution for liquidating property, when the property owner owes more than the property is worth. Bankruptcy is for the debtor unable to meet financial obligations, and in some instances, it is a way for him to restructure his finances and keep his house.
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Short Sale
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For some struggling property owners, short sale is an alternative to foreclosure. In a short sale, the property sells for less than the property liens. It requires the permission of the lender, who will typically only agree to a short sale if property values have dropped and the current market value of the property is less than the outstanding loan balance. The property owner lists the property, and after accepting an offer from a buyer, sends it to the lender for approval. The lender accepts, rejects or counters the offer. For a successful close, the lender accepts less than the loan balance and releases the property lien.
Bankruptcy
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Bankruptcy is a way to liquidate debt or to restructure debts, using the court system. Four chapters of bankruptcy include Chapter 7, Chapter 11, Chapter 12 and Chapter 13. Chapter 7, the liquidation of non-exempt assets, is the most common form of bankruptcy. Chapter 13 involves reorganization and repayment, while Chapter 11 is commonly used by businesses, and Chapter 12 by family farmers. The forgiven debt is not taxed when released in a bankruptcy, as sometimes happens when a lender forgives a debt outside of bankruptcy, including some cases of short sales.
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Intentions
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Your intentions will determine if a bankruptcy or short sale is appropriate for your situation. If you need to liquidate property yet don't need to address other debt issues, a short sale is a way to avoid foreclosure when upside down in your loan. Both bankruptcy and short sale will damage your credit, yet it will take longer to repair your credit in a bankruptcy. Before proceeding, consult with your accountant and attorney to determine what solutions best fits your situation.
Short Sale to Bankruptcy
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While the lender sometimes forgives the unpaid amount in a short sale, this is not always the case. After the short sale, a lender might issue a deficiency judgment against the seller, holding the seller responsible for any unpaid balance of the loan. Determining factors of a possible deficiency judgment include state law and the agreement between the borrower and lender. If the lender does forgive the unpaid amount, it may be subject to taxation, unlike debt released during bankruptcy. While some tax exemptions apply, they don't apply in all cases. Some property owners who rush into a short sale without consulting with their accountant and attorney later face bankruptcy due to burdens of a short sale. Sometimes a foreclosure is a better option than short sale.
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References
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