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:

7 Tips for Short Sale

Addendum to Short Sale Listing

Advance Fees Continued and the FTC

Advance Fees – Short Sales – FTC II

Charging for negotiating short sales/Negotiators

Deficiency Judgments Nevada

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

Nevada Short Sale Documents

Seller Being Released From Liability Language in Shortsale

Seller Liability After Short Sale

Short Sale Advanced Fees

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