Foreclosure, Short Sale, or Bankruptcy

In a struggling economy and a terrible housing market, many people have found themselves unable to continue making mortgage payments and unsure of where to turn next. With foreclosures on the rise, more people are considering short sales of their homes. Many people do not want to consider bankruptcy, but that may be the best option both immediately and forward looking.

A foreclosure sale is a forcible sale of the home by the bank or lender. The debtor will get notice of the sale and when he/she must vacate the premises. Foreclosed houses are often sold at greatly reduced prices by the bank to another individual. This helps the banks cut costs of maintaining the residence waiting for a buyer. The difference between the price of the note owed by the first debtor and the price the new owner purchased the house for is called a deficiency. There are a number of ways banks may handle deficiencies. The bank can go after the original debtor for the difference and will likely have a successful law suit if it goes that far. Large banks often do not go after insolvent individuals; however, they may sell the debt to another agency that will be more likely to pursue the amount owed. The bank may also settle for a portion of the deficiency. Or, the bank may charge off the debt entirely. When a debt is charged off, or forgiven, by any creditor that amount becomes taxable income to the debtor. Hypothetically, say the note is for $200,000 and the bank sells the home after foreclosure for $150,000 and writes off the rest. The debtor now has to claim an additional $50,000 in income the following tax year. In some cases this may change a debtor’s tax bracket, meaning they will pay more taxes on all income, including this amount. In many cases this results in owing the IRS a substantial sum of money.

The consequences of a short sale are virtually the same. A short sale is simply where a debtor convinces the bank to accept less than what is owed for the house. The deficiency amounts are handled the same way as a foreclosure. Many debtors turn to short sales as an alternative to foreclosures, thinking this is the better option for their credit. Many lenders still have waiting periods for to buy a home for homebuyers with a short sale or a foreclosure history.

For these reasons, and many more, it may be in the debtor’s best interest to file a bankruptcy instead of foreclosure or short sale. A home can be voluntarily surrendered in a bankruptcy. This option may offer the debtor the opportunity to work with the lender regarding the timing of the surrender. Most importantly, after filing for bankruptcy, the lender cannot go after the debtor for the deficiency amount. Further, the deficiency amount deemed discharged through a bankruptcy is not taxable income to the debtor so he/she will not have to worry about unwanted tax consequences in following years. Bankruptcy will also eliminate other debts at the same time and the debtor can get a completely fresh start.

If you have questions about this, or would like to set up a consultation, contact a St. Louis Bankruptcy Attorney Today.