How Do Short Sales and Foreclosure Differ?

With the housing market the way it is, many people want to know: what is the difference between a short sale and a foreclosure sale?  And what difference does it make in bankruptcy?

In a short sale, you have defaulted on your loan and cannot make the payments, but your lender decides to allow you to sell the home for less than your loan is worth.  The bank will make the decision of whether to grant you a short sale and whether to hold you liable for a deficiency after the sale goes through. In some cases, lenders will require the borrower to sign a note agreeing to pay back the difference between the sale price and mortgage amount. A deficiency arises, but through negotiation.

In a foreclosure sale, the bank will either conduct a private sale or go to the court and do a judicial foreclosure, without your involvement.  It will sell the home for whatever it wants to, or can get, although a below market sale price can be challenged.

See also: How Long Does Foreclosure Take?

The Main Difference

The main difference between the two is that you are in control of a short sale. The process is more amicable than a foreclosure because you are working with your lender. Other benefits are that you will be allowed to buy another home much faster.  Federal guidelines permit you to buy another home immediately after a short sale if you were never more than 30 days behind on payment, with certain other restrictions.  After foreclosure, however, you may have to wait 5 years before you can buy again.

The Rules Change in Bankruptcy

However, the rules do change with a bankruptcy. In many cases, a short sale is not necessary or worthwhile if one is already filing bankruptcy. Speaking to a competent consumer attorney before making any decisions about a short sale is a very smart choice.

If you still owe money on your loan after either a short sale or a foreclosure, whether you still owe the lender that money will depend on where you live.  Also, this is the type of deficiency that can be discharged in a bankruptcy if you choose not to keep your house. In Arizona, you will not owe your lender in most cases, and can walk away.  In California, you can only do so after a short sale, but remain liable for the debts after a foreclosure sale.

See also: Chapter 7 Bankruptcy in Arizona: What You Need to Know

In Chapter 7 bankruptcy, debts that are not secured by any collateral can be discharged.  Thus, deficiency judgments, or these debts you may still owe after your home was sold, can usually be discharged in bankruptcy.  If you are considering a short sale or foreclosure and bankruptcy, consider talking to a qualified bankruptcy attorney.

Rob Cohen

Rob Cohen, the Managing Partner of Cohen & Cohen P.C., is a bankruptcy attorney that practices in Colorado and Wyoming. He serves as a Chapter 7 Bankruptcy Panel Trustee, and has to date administered over 8,000 Chapter 7 bankruptcy estates. Rob is a Certified Consumer Bankruptcy Specialist, and was nominated for Denver Business Journal’s 40 under 40 in both 2014 and 2016.
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