Today I received an email from ... I'll call him John, who just can't seem to understand why a short sale is better for him than just walking away and letting the bank foreclose.
John was current on house payments but his lender wouldn't consider doing a short sale until he was delinquent so he stopped making payments. He said he had a small reduction of income due to a loss in a part-time job, however he still had his full-time job, and while losing some of his income, he still had enough to cover his monthly obligations, including his first and second mortgage.
While I knew this was going to be a difficult one to process, I collected all his documents and we started the short sale. We sold the house right away and now after more than six months of negotiating with his lenders, I finally received the approvals from both lenders! John, however, is upset and wants to walk away because his first lender wants the right to claim a deficiency. ( A deficiency is when the bank gets less than the balance owed, and holds the borrower responsible for the difference). For instance, if you owe $100,000 to the mortgage company and they receive $55,000 on the short sale, the remaining difference of $45,000 is the deficiency and can be pursued after the short sale.
So John now wants to kill the short sale, let the bank foreclose and declare bankruptcy. However, while I'm not an attorney, and recommended to John that he contact a bankruptcy lawyer because based on his income alone, I didn't think that he meets the "means" test for filing a Chapter 7. And because he still earns enough to cover his obligations, while maybe a bit "tight", I still didn't feel he would be eligible but only an attorney could give him the correct answers.
John seems to think by letting the bank foreclose that he will get out of the deficiency, and that is the furthest from the truth. The deficiency judgment still happens with a foreclosure, and John will be personally liable for the entire amount of the judgement. If he were able to file a chapter 7 however, that will eliminate all unsecured debt including deficiencies after a foreclosure.
If John were to decide to do a Chapter 13 (which I've heard referred to as "wage earners" bankruptcy), then John would still be responsible to pay some of his unsecured debt through a "payment plan", and in this scenario a short sale that slashes this debt before bankruptcy is highly beneficial to him. The short sale will reduce his payments by reducing his unsecured debts.
Bottom line here is, if you are considering do a short sale but also are considering a bankruptcy, talk to a bankruptcy attorney first. Get some straight answers beforehand.
I'd love to help you if you are considering a Short Sale on your home. Also, I can help you understand your options if want to save your home! Just give me a call at 586-438-3038 or visit my website specially dedicated to short sale information:
Dolores Gaskell, CDPE (Certified Distressed Property Expert)
Macomb Metro Realty, Inc.
Chesterfield Township, MI