This is a follow up to my March 20, 2009 post Short Sale Seller Files Bankruptcy.
Bankruptcy in a short sale comes in two forms – the seller is already in bankruptcy or files during the short sale process.
QUESTION: Why should a seller in or considering bankruptcy perform a short sale?
ANSWER: To start their “waiting period” before a borrower can be eligible for certain loans. The short sale waiting period is usually shorter than the foreclosure waiting period.
Generally bankruptcy serves to eliminate the obligation to pay a debt. In the words of the greater bankruptcy lawyer Robert Charles. It does not eliminate the debt, it just eliminates one party’s obligation to pay. In recent history persons seeking bankruptcy would more or less abandon over encumbered properties, allow it to go to foreclosure and wait some number of years before their re-entered the economy in attempting to purchase a home. Today, certain loan programs allow purchases after a short sale sooner than a foreclosure, even after a bankruptcy.
Look at FannieMae for example. FannieMae has a great role in conventional mortgages as America’s largest mortgage buyer. It sets guidelines to lessen the chance a borrower will go into foreclosure. FannieMae’s current guidelines have separate waiting periods depending on the type of foreclosure, in other words if it is a short sale or a classic foreclosure. Fanniemae underscores in their separate waiting periods, the “importance of borrowers working with their [lenders to avoid foreclosure.” Short sellers are rewarded with the shorter waiting period, currently a difference of 7 to 2 years depending on the circumstances. It is more complicated than simply stating 7 vs. 2 years. This is just one example, but there is a difference and the short gets the longer end of the stick…you can read guidelines àhere.
Bankruptcy has its own restrictions, its own waiting period effects. However, even with bankruptcy (and its additional waiting periods) combined with a foreclosure, vs. a bankruptcy combined with a short sale; again the short sale can have drastically different waiting periods. And if the debtor has “extenuating circumstances” waiting periods post bankruptcy combined with a short sale can be quite reasonable.
ALSO, by not performing a short sale a debtor is waiting for the lender to foreclose. The lender has no duty to hurry up the foreclosure. Nor does the bankruptcy process really address this issue. Bankruptcy removes liability, but does not necessarily aid in starting the beginning of the waiting period.
I have been brought in on numerous transactions in 2012 where a purchase fails due to the time period not being ripe yet for a new buyer. Each time the buyer filed bankruptcy some years prior. And each time the buyer believed that eventually their home had been foreclosed upon. In some instances the buyer was not even aware they were still on title to their former residence and in others the foreclosure had only been finalized some months prior, although the bankruptcy case was successfully completed years prior. In these scenarios each time, the purchaser (formerly in bankruptcy) was unable to get around the requirements of the current lender and were instructed they would have to “wait” out the actual period. A short sale during bankruptcy starts the waiting period more effectively.
This is part of my short sale series listed below in alphabetical order:
Addendum to Short Sale Listing
Advance Fees Continued and the FTC
Advance Fees – Short Sales – FTC II
Charging for negotiating short sales/Negotiators
Foreclosure and the One Action Rule in Nevada
HAMP the Federal Shortsale Program coming April 2010
Income Taxes & Foreclosures/Shortsales
IRS PUBLICATIONS shortsales/foreclosures:
IRS publication on how 1099 taxes are calculated, exempt, etc.
IRS explanation as to taxes resulting from Foreclosure and Debt Cancellation.
Judicial Foreclosures (Short sales are looking more attractive..)
Lender Short Sale Approval Addendum
Nevada Supreme Court Mandatory Mediation Program and How it Affects Shortsale
Seller Being Released From Liability Language in Shortsale
Seller Liability After Short Sale
Short Sale Addendum to Purchase Agreement October 2010
Short Sales and Bankruptcy and Waiting Periods
Short Sale Junior Lien/Senior Liens Rights To Sue & Other Changes
Short Sale Wallet Size Answer Sheet
Ten Facts about Mortgage Debt Forgiveness
Questions? email me darren@dwelshlaw.com
October 5, 2012 at 3:38 pm
[…] Short Sales and Bankruptcy and Waiting Periods […]
November 19, 2012 at 11:26 am
I recently forwarded this message to a past client who understood that “surrendering” the property in banruptcy allowed him to walk away. Two years after Bankrupcy was discharged, I met him and showed him that he was still on the title and that liens (HOA, Trash and Sewer) recorded against the title holder were still accruing. He was incredulous and I suggested that he consult an attorney. He went back to back to the attorney who handled the bankrupcy. From a lender’s perspective I understand that this might lead to lender filing for a juidicial foreclosure…….
December 20, 2012 at 1:10 am
I did a BK7 discharged in 2009 and did not reaffirm my property then I did a short sale before it went into forclousure. My question is when does the clock start for me to buy another home 4 years after my BK7 or 2-3 years after the short sale? What is the waiting period in my case scenario?
December 20, 2012 at 10:12 am
I am not sure. The good thing is atleast you know it is feasible to figure it out due to your succesful SS. You should contact a Lender and commence qualifying. If you do not have a lender, call Shelter Mortgage in Las Vegas, for example.
December 20, 2012 at 10:16 am
If I go by the BK7 waiting period to re-purchase I am ready now…but if the short sale after the BK7 started the short sale clock of 2-3 years then the soonest for me would be 9-13 conventional or 9-14 FHA…this is where I am confused..
January 2, 2013 at 12:14 pm
[…] Short Sales and Bankruptcy and Waiting Periods […]
January 3, 2013 at 4:56 pm
[…] Short Sales and Bankruptcy and Waiting Periods 10.5.2012 […]
May 31, 2013 at 1:07 pm
[…] Short Sales and Bankruptcy and Waiting Periods 10.5.2012 […]
June 12, 2013 at 10:53 am
Are there any regulations that require the bank to respond back to the buyers for a short sale? We have been involved in one for 7+ months and had 2 counter offers from the bank which we accepted both times. Then nothing. How do you find out if they are even serious about the offers or plan to do nothing? Don’t tell me to ask my disinterested and incompetent Realtor either. The listing agent has been much more helpful but they do not know anything other to say they are waiting on the bank.
September 30, 2013 at 3:53 pm
[…] Short Sales and Bankruptcy and Waiting Periods 10.5.2012 […]
December 17, 2014 at 6:51 pm
[…] Short Sales and Bankruptcy and Waiting Periods 10.5.2012 […]
February 3, 2015 at 12:59 pm
[…] Short Sales and Bankruptcy and Waiting Periods 10.5.2012 […]