If I Do a Short Sale Can the Bank Touch My Account?

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Short sales: what assets are and are not protected?
Short sales: what assets are and are not protected? (Image: Jupiterimages/Comstock/Getty Images)

Homeowners who are attempting to get a short sale approved by their lenders will find their most personal financial information scrutinized. Before you liquidate your retirement accounts to satisfy your mortgage, educate yourself as to what lenders are entitled to ask for and what they aren't. Don't risk unnecessarily withdrawing your retirement accounts only to incur taxes and penalties. Your non-retirement accounts may be vulnerable, however.

401ks, 403bs and Pensions

Your lender is not permitted to "raid" or liquidate employer-sponsored 401k, 403b or pension plans thanks to ERISA, the Employee Retirement Income Security Act. In fact, other than the IRS or former spouses, these accounts are protected from all creditors. It is never considered advisable to liquidate or borrow against your retirement savings to save your home. If you recently rolled over money from an employer-sponsored plan into an IRA, that money is protected as well. Be sure to save your account statements that show the rollover.

IRAs

Your IRA is another story. Depending on the state in which you live, you may or may not be able to shield these assets from creditors. The exceptions to this rule are if you filed for bankruptcy, in which case current federal law states that up to one million dollars in contributions is protected, or if the account is a rollover from a former employer-sponsored retirement plan, as noted above. If these situations don't apply to you, ask your attorney; he will be able to advise you with regard to your state's laws. Some states grant 100 percent protection; others only provide for "reasonable recovery."

Checking, Savings and Other Liquid Accounts

Other cash or "liquid" accounts are fair game. This includes monies in all checking, savings and non-retirement investment accounts, such as brokerage accounts, annuities and certificates of deposit. It may also include college savings accounts, such as 529 plans. If you have a whole life insurance policy that has a cash value, this is counted as a liquid asset as well. In short, any account that contains cash or liquid securities, including stocks or bonds, that is not considered a retirement account is vulnerable.

Bankruptcy and Short Sales

In a bankruptcy, any creditor action is instantly stopped, including foreclosure. Remember, in most short sales the seller is far behind in payments and is racing against the foreclosure clock. Declaring bankruptcy may allow your lender more time to approve the sale. Since under ERISA your direct contributions to your IRA are protected up to a million dollars, if your state is about to "attach" your IRA, bankruptcy is an option of last resort. Be certain to keep careful records showing your IRA contributions, however.

Considerations

Be advised that money transfers into protected accounts prior to applying for a short sale will be looked upon most unfavorably by your lender and may even be considered fraudulent, especially if your lender suspects that you are attempting to hide assets in order to avoid losing money on a home. Honestly evaluate your hardship. If you have the means to pay, do. Otherwise, know that at least your hard-earned employer-sponsored retirement money is untouchable.

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