Clients who surrender their home or condominium in bankruptcy are often approached by the mortgage lender or a realtor, about doing a short sale. For most, this is confusing. The property was given back to the mortgage lender in bankruptcy, so why is the homeowner being asked to participate in a short sale?
After you receive your discharge in a Chapter 7 where you surrendered the home, you are not liable for the mortgage. Fortunately, for most clients this means they get to live ‘rent free’ at the property until the bank decides to move forward with foreclosure– and sends you a notice to vacate. You should feel comfortable signing off on a deed to the bank or to the new buyer, if requested, but consulting a lawyer is always a good idea.
Will My Credit Be Affected By A Foreclosure?
Your bankruptcy discharged the debt owed to the mortgage lender. If there is a subsequent foreclosure, there is no further credit damage– the debt has already been discharged.
What About A Short Sale?
If you are approached by the bank or a realtor about doing a short sale, essentially what is being proposed is that your payoff to the bank be lowered to accommodate a low sale price. At this point you should be asking yourself: What payoff? I thought I surrendered this property and am not responsible for the mortgage? And you’re right. You have no obligation. But a short sale benefits the bank and the new buyer and realtor, so that’s why you’re being approached.
I Want To Help. What Should I Be Concerned About?
It’s common after bankruptcy to sign over your legal interest in property either to the bank or to a 3rd party buyer in foreclosure; however, if are the selling party on a short sale transaction, a few red flags are raised:
1. As seller on a contract for land, you are taking on responsibilities to deliver the property in a certain condition, and free of liens or encumbrances, including HOA dues and taxes. Those were discharged by your bankruptcy and to the extent any HOA dues have accrued since you sold, they are typically taken care of by the bank or buyer in foreclosure.
2. In a short sale, the bank is lowering the amount due to them on your mortgage. After your discharge you owe them nothing. If they ask you to ‘reaffirm’ the debt as part of the short sale, you’ve just re-committed yourself to the loan amount. Then, when the bank sells to the buyer and lowers their payoff to do so, you receive a 1099 form for “forgiveness of debt.” This means you will be responsible for the amount forgiven, from a tax perspective. If the bank forgives $20,000 in debt to make the sale work, you’ll owe the taxes due on $20,000 of income.
3. The bank is looking to save the cost and time associated with the judicial foreclosure process. This is one reason the short sale is attractive to them. They save money and time, and give you nothing in return except the uncertainty as to your new obligations once you start signing papers with them.
Talk to an attorney before assisting the bank with a transaction related to your property. Your bankruptcy attorney should be more than willing to review documents for you. If he or she isn’t, feel free to call me. I’m happy to help make sure you don’t accidentally undo the benefits of bankruptcy. 704.749.7747.