Let’s look at some commonsensical reasons to do a short sale of your home and see if they make sense.
My last blog post showed how a short sale may be harder to achieve than you might think, and how they can be dangerous if you do it without advice from an attorney looking out for you.
So today we follow up by looking more closely at why you would do a short sale. Besides probably the most common one of simply trying to avoid the bad credit of a foreclosure, which we addressed last time, here are some other common reasons:
1. No Choice, Can’t Afford the House
If your income has gone down or your mortgage payments have gone up so that you can’t keep making the payments, it may make sense to downsize—sell your home and rent. And if you can’t sell your home because it’s worth less than the mortgage balances, then a short sale may seem to be the only way to leave the home and its debt behind.
Monthly rental payments have climbed significantly in the last several years as more people have lost their homes to foreclosures, and less young people have been able to afford or qualify for a mortgage because of the tough employment market and skyrocketing student loan debt. Demand has outstripped the supply of rental housing in many markets, greatly increasing the cost to rent.
Also, you have many legitimate tangible and intangible reasons to stay in your home. If you leave this home it may be a long time before you would have the financial means to buy again, especially with the tighter credit standards that are likely to be in place for years. Property values in many parts of the country have gone up significantly in the last year or two and seem to be on a trajectory to continue doing so. So you may be building equity in your home soon. And your family may benefit from staying in your home for deep personal reasons—to maintain family stability, to avoid leaving your kids’ school district, and such.
So if there would be a way that you would be able to afford your home, that way would be worth considering carefully.
2. Can’t Reduce House Mortgage Payments, Right?
It’s true that you are largely stuck with whatever your monthly first mortgage payment amount is. And if you are behind on those payments, you will have to catch up if you want to keep your home.
If you have a second (or third) mortgage, you may be able to “strip” that mortgage off your home’s title so that you would not need to make that mortgage’s monthly payments. This can happen under a Chapter 13 “adjustment of debts” if your home is worth less than the balance of your first mortgage, so that there is no equity at all in your home for the second mortgage.
By “stripping” this second mortgage from your home, your debt on that mortgage debt would be treated as an unsecured debt, just like all of the rest of your conventional unsecured debts (credit cards, medical bills and such). This means you would pay that mortgage debt during your 3-to-5 year Chapter 13 case as much, but only as much, as you could afford to pay on it, which is often not much—sometimes even nothing. Then at the end of the case, whatever has not been paid by then is discharged–legally written off completely.
As a result you avoid having to pay the monthly second mortgage payments, and the debt against your home is significantly reduced. These—along with the other benefits of Chapter 13—can potentially make hanging onto your home both financially feasible in the short term and financially much more sensible in the long term. You would pay less each month for a home with much less debt on it.
3. Needing to Resolve Other Liens
You may feel compelled to do a short sale not just because of your mortgage obligations, but because of one or more other obligations which have attached to your home’s title, with a tax, judgment, support, utility, or construction lien.
You may be under a great deal of pressure to pay one or more of these obligations. The IRS, state tax, and child support enforcement agencies can be especially aggressive. So you could understandably feel that you have no choice but to sell your home to get that aggressive creditor paid, and to sell by short sale if necessary.
The problem is that the more lienholders you have, the more creditors must be corralled into accepting less than their full balance in return for releasing their lien on your home. And even if the special lienholder releases its lien for less than full payment so that the short sale succeeds, you will continue owing the balance, and likely continue being pursued for payment.
Either Chapter 7 or Chapter 13 bankruptcy can often deal well with each of these kinds of lienholders. Both may be able to “void” judgment liens. Chapter 13 is particularly adept at attacking tax and support liens and their underlying debts. Furthermore, you can be protected for years from any further collection efforts by these otherwise very powerful creditors, in ways that no other legal procedure could accomplish.
Bankruptcy options often give you more control over your home and over your financial life than would occur through a short sale. Given what’s at stake, it certainly makes sense to consult an attorney about your options. Your attorney is on your side, legally and ethically bound to explain all your options as they relate to your personal goals and your best interests.