Bankruptcy or Short Sale: Which is better?

If you are a homeowner struggling to pay your mortgage, it is important to consider all of your debt relief options. Two options you should educate yourself about are filing for bankruptcy and short sales.

A short sale is the process that permits you to sell your house for a lower amount than what you owe on your mortgage loan. The sale proceeds are used to pay a large portion of your mortgage debt, but the lender is still “short” or owed money after the transaction has been completed.

In deciding whether filing a bankruptcy or pursuing a short sale is more beneficial for you, there are numerous factors to consider. Below are a few things to think about:

  • Time. The short sale process can be complicated and very time-consuming. You must obtain your mortgage lender’s approval to pursue a short sale and many lenders take a long time to review the documentation and provide the necessary approvals. Also, there is no assurance that your short sale will close. If you file a Chapter 7 or Chapter 13 case, you are provided instant relief from your creditors because the automatic stay prohibits any further collection efforts against you while your bankruptcy is pending. Once you obtain your discharge order, you eliminate most, if not all, of your debt.
  • Deficiency balance. In a short sale, there is always a deficiency balance remaining on your mortgage after the sale of your home. Thus, it is vital to determine in advance whether or not your lender will waive the right to collect the deficiency balance as part of the short sale agreement. If not, you will remain liable to pay the remaining amount. In a bankruptcy case, you can eliminate the deficiency balance after the short sale or foreclosure of your home.
  • Total debt. If you have a significant amount of debt in addition to your mortgage, such as medical bills or credit card debt, a short sale might not be the best option. However, if your mortgage loan is the cause of your financial troubles, a short sale could be a good solution. Filing a bankruptcy is the most comprehensive means for dealing with numerous different types of debt at one time. All of your creditors are included in a bankruptcy, so you are able to obtain a fresh financial start at the conclusion of your case.

If you are interested in learning whether a short sale or bankruptcy is the best option for you, contact us for a free consultation.


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