When someone is facing foreclosure and their property is underwater, many times homeowners are faced with the decision to either file bankruptcy or proceed with a short sale. So which one is better? A short sale is when you sell your home for the amount that it is owed. Many people are under a misconception that if they do a short sale then it is better than doing a bankruptcy, however, that is not necessarily true. A short sale allows the homeowner to sell their home for less than what is owed on the mortgage. The amount that is left over is called a Deficiency. Many realtors/ brokers will try to convince you that doing a short sale will save your credit and be better than doing a bankruptcy but this is simply not true.
Many people run into problems when they do a short sale. One of the issues they may run into is trying to find someone to purchase their home. The longer it takes for someone to purchase your home the easier it is for the bank to foreclose on the property and auction it off. Moreover, many times the bank simply, will not allow the foreclosure to go through. You can go for months submitting paperwork, having a buyer, sending in all the documents and at the end of the day the bank may still refuse to allow the short sale to go through. Just like loan modifications, short sales are extremely likely to be denied even after spending numerous days and hours trying to negotiate with the bank.
Another complication is that people who do short sales think that since the bank agreed the bank can no longer go after them any longer. This is false. Even though the bank may have approved your short sale the bank can still go after you for the deficiency ( the unpaid amount). Many times people get sued years later after a short sale. In essence, the bank is basically allowing you to find them a buyer but still saying you owe them money and must pay.
Further, even if you believe the hype that doing a short sale is better than doing a bankruptcy for your credit you will probably be surprised to learn that your credit is still going to take a huge hit. Many times doing a bankruptcy will allow you to build your credit more quickly than doing a short sale. If you do a bankruptcy you can have your credit back up to normal within two years after getting your bankruptcy discharge. Further, a bankruptcy will stop you from being sued years later for the “deficiency”. Filing a bankruptcy means that the bank can no longer go after you years later or sue you.
Another thing to note if you do a short sale you may be taxed on the forgiven amount. Thus, even if the bank allows your short sale to go through and they do not come after you, the IRS may still force you to pay taxes on the forgiven amount.
If you are wondering whether to do a short sale or file bankruptcy in New York it is important to speak with an experienced New York bankruptcy attorney.