‘Cancellation of Debt Income’ Category

Foreclosure vs Short Sale?

People ask me all the time...which one is better - a short sale or a foreclosure? Well the answer is as always...it depends.  People do short sale...


People ask me all the time…which one is better – a short sale or a foreclosure?

Well the answer is as always…it depends.  People do short sales primarily for a few reasons:

(1) they are working or have a relationship with a realtor.  Of course, that realtor gets a commission on a short sale and NOT on a foreclosure.  The realtor tells them that they won’t have a tax or legal problem.  Not sure what made them CPAs or attorneys.

(2) they feel it is the “right” thing to do.  Their morals or ethics tell them that they are a better person if they do a short sale because they are at least trying.  When you let your house go into foreclosure, you are essentually giving up.  So you feel like a better person if you do a short sale rather than a foreclosure.

But the reality of the situation is that it may be easier and safer to let your home go into foreclosure.  Many states have enacted strong anti-deficiency statutes that do not allow a bank or mortgage holder to sue the borrow for any deficiency balance.  There are some criteria that you need to meet, so make sure that you consult an attorney to see if you qualify.

To do a short sale, you need to haggle with the bank.  They often will ask you to come out of pocket to pay, at least in part, for some of the deficiency balance.  This may not make a lot of sense if you already have damaged your credit as a result of getting behind in your payments.  When you consider that you may be covered under an anti-deficiency statute on a foreclosure but not on a short sale, it makes a foreclosure sound a lot more appealing.  Talk to your attorney.

I would never tell anyone to stop making payments on their home.  I also would not tell someone to do a short sale rather than a foreclosure.  Everybody has different morals and ethics and each person is in a unique situation.  Just educate yourself and make the best decision you can.

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