Does a Short Sale Result in Deficiency Debt?
Many homeowners seek a short sale if they are no longer able to maintain their mortgage payments or wish to step away from the property due to valuation issues. In most cases, the homeowner needs to prove a financial hardship for the bank to engage in a short sale. When the house is sold for an amount less than your mortgage, the remaining balance is known as "loan deficiency debt." The common perception is that a short sale is a better for your credit score than a foreclosure or voluntary repossession. Think again½any unpaid balance owed to the creditor(s) is called a deficiency debt and becomes an obligation at the conclusion of the short sale unless a waiver is specifically negotiated in the process. A waiver is not usually given, and is based primarily on extreme hardship. If during the short sale process the debt reduction is reported to the credit bureaus, it will adversely affect the credit score. According to Wikipedia:
"Despite significant misreporting on the topic, damage to one's credit due to a short sale is really no different from that of a foreclosure."
Before you move forward with a short sale, consider your alternatives. Weigh the pros and cons of each to determine the best way to handle your mortgage issue. Here are some options:
Reduce Mortgage Debt and Keep Your Home
Under a Chapter 13reorganization plan we have several tools to help you make your mortgage more affordable:
- Remove second mortgage or home equity loan: Through the plan you can remove secondary liens from your home. You are only required to pay what you can afford over the course of the program (36 - 60 months) and at the completion, the balance is legally eliminated.
- Loan Modification: We can submit a loan modification though the Chapter 13 bankruptcy process. The Chapter 13 plan uniquely provides both court oversight and attorney involvement on both ends of the modification process.
- Consolidate or Reduce Other Debts to make Mortgage Payments More Affordable: You may have other debts that are bloating your budget and making your mortgage payment unaffordable. By reducing and deferring these debts as necessary, we can balance your budget. Unsecured debts (such as credit cards or medical bills) are only paid after all secured debts and living expenses are paid. Unpaid balances are eliminated at the completion of the 36 - 60 month program.
We are available any time for a free consultation to review your finances and discuss your options. Call us today at 866-261-8282 to schedule a time to speak with a licensed attorney.
Surrender Your Home Through a Structured Bankruptcy to Avoid Foreclosure or Deficiency Debt and Reduce Damage to Your Credit.
If you determine that you can no longer afford the mortgage payments even if you restructure and reduce other debts from your budget, you may need to consider surrendering your home back to the back through a Chapter 7 Debt Elimination. This process legally eliminates any further debt obligation with the home and ensures you can move on with a clean slate and move towards your goal of improved credit. The Chapter 7 bankruptcy process also discharges all of your other unsecured debts, such as:
- Credit cards;
- Medical bills;
- Personal loans;
- Old utilities, etc.
By eliminating unwanted debt, you correct your debt-to-income ratio and allow room in your budget to pay your other bills on time - creating a positive payment history. These two factors alone account for 65% of your credit score according to FICO.
If you do move forward with a short sale, be sure to negotiate a waiver for the loan deficiency or settle debt immediately to avoid further damage to your credit
If you can prove significant hardship, you may be able to bargain a waiver with your lender for the deficiency debt. If you do get a waiver, be sure to have a professional review the paperwork to ensure that you are no longer legally obligated to pay the deficiency amount. Banks have been known to sell their "bad debt" to collection agencies for pennies on the dollar only to unleash a team of trained and persistent bill collectors to pursue the debt. If you can't eliminate the deficiency, perhaps you could offer a lump-sum settlement with the bank for a reduced amount. We help clients achieve non-bankruptcy debt settlement. Call today for a free consultationon how to resolve your mortgage deficiency debt through a settlement process. Overall our advice is: get debt resolution! No matter what route you take, ensure that you are:
- Legally protecting yourself;
- Aware of the outcome of your choices;
- Taking on the appropriate amount of debt for your circumstances or
- Immediately resolving the debt though Chapter 7, Chapter 13 bankruptcy or non-bankruptcy debt settlement.
We are on your side! Call us today at 866-261-8282 for a free consultation to speak with one of our licensed debt relief attorney about your options or schedule online.