With the real estate market in a slump and a slow economic recovery in front of us, many people are dealing with homes that are worth far less than what they owe on them.  The difficulty comes when they are put in a position of having to sell.  What do they do?  How do they get out from under? The answer depends on what the situation is that is driving the need to sell the home.

If you have a great credit score, can afford the mortgage payment going forward, but have to sell based on business or family relocation, or some other reason that precludes waiting for the market to recover, a short sale could make sense in an effort to avoid foreclosure and limit its negative effect on your credit.

Things to Consider

On the other hand, if you are behind on the mortgage, cannot afford the monthly payment going forward, and have a significant amount of other debt that generally makes you insolvent, you have to ask yourself this question: who am I really helping with a short sale, me or the mortgage company?

Is it really worth all of the trime and aggravation, especially if there is more than one mortgage held by more than one bank?  Think about the following:

  • If you have personal mortgage insurance (PMI) on the property, you are not necessarily "doing the right thing" by the mortgage company.  If the property goes to foreclosure sale and does not bring enough to cover the balance due, they can make a claim for the difference against the carrier to get paid.  You are also not necessarily helping yourself.  I had a client walk away from a short sale because the PMI carrier would not let the short sale go through unless the sellers signed a note for the $35,000 shortfall!
  • If you short sell the property, the home may go to someone else, but the bank may well pursue you for the difference!
  • Even if the bank does not expect you to pay the shortfall, if the property being sold is not your principal residence, or you are selling your residence some time after December 31, 2012, the shortfall "forgiven" will be considered income by the IRS and you will face a tax bill!
  • Your credit score may still be negatively affected by the fact that the mortgage was not paid off in full, whether by foreclosure or short sale, or even if you turn over title to your home to the mortgage company to avoid a foreclosure.

Then There's Bankruptcy

You need to look at the bigger picture. Do you want to short sell your home, face one or more of the risks listed above, and still not have a solution to your other mounting debt? Of course not! You need to look at what is best for you and not the mortgage company!

One solution is to file bankruptcy.  Why?

  • If you cannot afford the home anymore, you can walk away from it with no responsiblity for the shortfall to the bank.
  • There will be no tax bill for the "debt forgiveness income" of the shortfall as the IRS makes an exception in the case of bankruptcy.
  • If you are simply behind on the mortgage, but can afford the monthly payments going forward, a chapter 13 bankruptcy may give you a chance at a repayment plan that will bring you current over the next three to five years, and wipe out your credit card and other unsecured debt to the extent it interferes with your ability to make an extra payment every month to the mortgage company to accomplish this.
  • You are addressing all of your financial problems, not just the mortgage.

The downside is that the bankruptcy may well have a much greater effect on your FICO score than a foreclosure, because it results in non-payment of all of your debts, not just one.  However, if after consulting with an attorney, bankruptcy is what is best for you, this should not stand in your way.  File bankruptcy and get a fresh start.

So What Should I Do?

If you live in southern New Jersey, are facing foreclosure on a home you cannot afford, and are considering filing bankruptcy, Please feel free to call me at 856-432-4113 or contact me through this site for a free consultation in my Woodbury office to discuss your case.


Steven J. Richardson
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Richardson Law Offices