Bankruptcy: An Alternative to the Short Sale

February 16, 2012 by  Filed under: Bankruptcy 

The real estate market is struggling right now and many homeowners have homes with mortgages they can’t afford but are unable to sell their property because they owe more than the home is worth. For homeowners in this situation, the short sale is becoming more popular, but for many people it is not the best solution to their financial woes. A short sale is a real estate transaction in which a mortgage company agrees to allow the sale of the property for an amount less than the debt secured by the property, and the unpaid portion of the debt is released by the lender.

The short sale is not without problems though. Three issues often come up in these types of transactions. First, the mortgage documents sometimes fail to address the unsecured portion of the debt that will remain after the sale of the property. If not properly released by the mortgage company, the remaining unsecured portion of the debt may be turned over to collection agents who may seek to collect the debt from the homeowner.

Second, if the debt is released the forgiven portion could be reported to the IRS as income and the homeowner may be stuck with an increased tax liability. In 2007, Congress enacted The Mortgage Forgiveness Debt Relief Act of 2007. This law protects homeowners from tax liability resulting from cancelled home loan debt. In its original form, this Act was set to expire in December of 2009, but Congress extended it to 2012. Before entering into a short sale homeowners should consult with a tax attorney to determine if there will be any tax liability resulting from the forgiven portion of the debt.

Third, a short sale does not address the homeowner’s other debts. Mortgages are rarely a homeowner’s only debt. After the mortgage is released the homeowner must still find a way to pay their credit cards, medical bills, unpaid child support, taxes, title loans, payday loans, student loans, and all other debts.

For many people bankruptcy is a better option than the short sale. Bankruptcy will allow discharge of the entire mortgage without the homeowner having to get permission from the mortgage company and finding a buyer for their home, debts discharged in bankruptcy are not reported to the IRS as income, and bankruptcy also addresses many of the homeowner’s other debts allowing discharge of many of these debts without any repayment. Before pursuing a short sale, a homeowner would be wise to consider their other options, including filing bankruptcy.

Nathan S. Graham is an attorney with The Wright Firm, LLP. Nathan represents individuals and debtors in Chapter 7 and Chapter 13 bankruptcy cases. The Wright Firm, LLP, has offices in Dallas, Denton, Lewisville, and Frisco.

For more information about Nathan Graham visit the Wright Firm’s web site at http://www.northtexas-bankruptcy.com or read Nathan’s blog at http://www.northtexas-bankruptcy.com/blog/.

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