Wednesday, September 15, 2021

Short Sale or Chapter 7 Bankruptcy?

If you are facing foreclosure, you may be looking at options to avoid foreclosure such as a short sale or a deed in lieu of foreclosure, but you also might be thinking about filing for Chapter 7 bankruptcy. Which option is the right one for you? In order to reach a definitive decision, it is always a good idea to seek advice from an experienced Oak Park foreclosure defense attorney about your particular situation and the facts surrounding your case. In the meantime, we want to explain some of the issues that might arise when deciding between a short sale or a Chapter 7 bankruptcy filing.

Thinking About Short Sales and Bankruptcy Based on Your Existing Debt

If you are considering the possibility of a short sale or filing for Chapter 7 bankruptcy, it is important to think carefully about the other debt you have currently. Is the majority of your debt associated with your mortgage, or are you also facing a looming amount of consumer debt from medical bills, credit cards, student loans, or other debt sources? If it is the former—that is, if most of your debt is linked to your mortgage—a short sale may be a strong option for avoiding foreclosure while also allowing you to avoid a bankruptcy filing. Yet if you are also struggling with a significant amount of additional debt, some of the limitations associated with a short sale might mean that filing for Chapter 7 bankruptcy will be more beneficial for you.

Short Sales Can Allow You to Avoid Foreclosure but May Come With Debt

What are those limitations of a short sale when it comes to avoiding foreclosure? First, let us emphasize that short sales can be extremely beneficial for consumers who are struggling largely with mortgage debt and are facing foreclosure. To be clear, a short sale is a process through which your mortgage lender can agree to take a payment for less than the amount you owe on your mortgage and release its lien for that lower amount so that the house is not ultimately sold through the foreclosure process. How does this work? The house will be put up for sale as a short sale, and even if it sells for less than the amount you owe on your mortgage, the lender will accept that amount.

However, there are some potential complications. If your mortgage lender will not waive the deficiency amount—the amount of money still owed based on the sales price of the house and your mortgage amount—then you will still owe that money. These deficiencies can range widely in amount, from several thousand dollars to tens of thousands of dollars. Your lawyer can help you to negotiate a waiver from the lender so that you do not owe this money. Yet even if the lender agrees and forgives the remaining amount, you will likely be required to pay taxes on that forgiven amount. While the tax on $5,000 of forgiven debt will not be particularly steep, the tax consequences of having, for example, $100,000 or more of mortgage debt forgiven can be significant.

Learn More From a Foreclosure Defense Lawyer in Oak Park

If you are considering a short sale or bankruptcy, you should seek advice from our Oak Park foreclosure defense attorneys today. Contact the Emerson Law Firm for more information.

See Related Blog Posts:

Five Things to Know About Short Sales

What is a Consent Foreclosure?

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