At Howard Law LLP, we work with people who need help resolving serious debt -- including uncontrolled mortgage debt. Unfortunately, like other California bankruptcy attorneys, we've seen a sharp rise in the number of clients who need mortgage loan modifications that could save their homes from foreclosure. In most cases, the homeowners know foreclosure is coming months before it becomes a reality. This gives them -- and us, if we can step in early enough -- time to consider options that might help them avoid the negative credit consequences of a foreclosure. One of those options is selling the home in a "short sale."
In a short sale, homeowners sell their home for less than the balance left on their mortgage loans. The bank that owns the mortgage must give permission for the sale, because the property is still collateral for the mortgage loan. However, the bank may or may not choose to forgive the remainder of the debt the homeowner owes. Banks and homeowners may both lose money in this transaction, but they also avoid a foreclosure, which is often bad for both parties. (Remember, banks don't want the hassle of maintaining and selling real estate, especially if they must sell it at a loss.) In addition to being potentially cheaper than foreclosure, a short sale is also generally faster.
Short sales have become more common in Southern California as home values have dropped dramatically, leaving many homeowners with more mortgage debt than their homes are worth. They offer a way for people in a tough situation to sell their homes and walk away with less damage to their credit than a foreclosure would do. However, a short sale isn't right, or even available, for everyone. For one thing, a bank is unlikely to approve a short sale if payments are current, or it believes the homeowner has the income or assets to keep making loan payments. The loan may need to be in default before the bank's loss mitigation department will even consider a short sale. For another, homeowners with a tax lien or other obligation on their property may not even be able to pursue a short sale.
Furthermore, a short sale may not solve the homeowners' debt problems. A bank can agree to a short sale but choose not to forgive the rest of the mortgage loan, which means the homeowners still owe the balance of the mortgage not paid by the sale. The homeowners' credit will also take a hit, though not as badly as it would if they had gone into foreclosure. They must continue making mortgage payments while they find a buyer, which prolongs some people's financial problems. And if the debt is forgiven, the IRS could count it as taxable income, depending on the homeowners' other financial circumstances.
Finally, a short sale may not be right for people who know they are going to file for bankruptcy. Some people may be able to save their homes in a Chapter 13 bankruptcy, depending on the circumstances. But even if they can't, their credit takes a substantial hit in a bankruptcy, just as it would if they went into foreclosure. This erases some of the big disadvantages of foreclosure, leaving the advantage of being able to live in a home rent-free and save money for months during the foreclosure and eviction process.
As you can see, whether to pursue a short sale of your home depends very heavily on your financial circumstances. If you'd like help understanding the advantages and disadvantages in your own case, you should talk to the Anaheim bankruptcy attorneys at Howard Law LLP. In addition to outlining your short-sale options, our experienced lawyers can help you renegotiate your mortgage, get control of unsecured debt or start a bankruptcy filing. To tell us about your case at a free consultation, please contact us online or call 1-800-872-5925 as soon as possible.