Short Sale and Bankruptcy
If a person needs to file bankruptcy anyway, why should he consider a short sale? Any personal obligation to his mortgage company will be discharged, so there is no incentive to sell the property, right?
There are two good reasons to consider a short sale if you can’t hang on to your home. First, a short sale reduces the time you have to wait before you qualify for a government-backed loan from Fannie Mae or Freddie Mac. The waiting period for these programs is generally two years from the date of discharge; however if you surrender your home in bankruptcy, it will likely go through foreclosure which can extend the waiting period up to 7 years. A borrower is eligible for an FHA mortgage three years after bankruptcy and foreclosure, but this time limit is reduced to one year if the bankruptcy debtor did a short sale on his home.
The second benefit of combining a short sale with a bankruptcy is avoiding post-bankruptcy homeowner association fees. A short sale eliminates any liability for HOA fees. Many lenders are guilty of procrastinating on a foreclosure to avoid incurring HOA fees, but once the home is sold, the debtor is no longer liable for any home related fees.
When considering a short sale along with a bankruptcy case, it is important to investigate any potential tax consequences. While The Mortgage Forgiveness Debt Relief Act of 2007 excludes cancelled home loan debt from income, that law is scheduled to expire on December 31, 2013. The Act protects a homeowner from up to $1,000,000 in debt cancellation income or up to $2,000,000 if a married couple. However, the Act does not apply to certain situations, like short sales of rental property.
If you need to file bankruptcy and cannot keep your home, discuss the possibility of a short sale with your attorney. A short sale may improve your chances of future home ownership.