Loss Mit Services

The Real Short Sale Tip of The Week 5-27-09

Posted on 26. May, 2009 by ctlms in Short Sale, foreclosure

Facing Foreclosure?

Short Sale or Bankruptcy, which fits your client?

Obviously as a real estate agent a short sale is better for your bottom line, but is it best for your client?  Well a lot of times, YES.

Let’s look at the options:

Bankruptcy

Bankruptcy can take 2 routes, Chapter 13 and Chapter 7. 

Chapter 13 is the reorganization of debt.  In most cases the bankruptcy trustee will divide all the debtors missed payments on all accounts by up to 60 months to create a monthly payment for the debtor.  That payment must be made on top of the minimum monthly payments for all accounts plus a 10% premium to the bankruptcy trustee.  So as you can see Ch 13 bankruptcies rarely succeed.  Actually barely more than 10% succeed.  If the debtor couldn’t make their original payments it is unlikely they can make those payments plus a bankruptcy payment plus 10%.

Chapter 7 is a liquidation of assets and debts.  If a homeowner has unsecured debts such as personal loans and credit cards that if eliminated would free up enough money to pay for their home, it is possible to eliminate those debts in Ch 7 and keep the home.   But this is not the norm.  Also if the mortgage debt is eliminated in the bankruptcy, the bank will still need to foreclose on the property to take it back and liquidate it to recover as much money as possible.  So now the homeowner has a Bankruptcy and a Foreclosure on their credit.  Bankruptcies are often used to buy more time for the homeowner but have long reaching consequences that are rarely worth the few months extra.

Now if the home and its mortgage debt are the major financial hurtle that the homeowner faces, then selling it, even in a short sale, is far better than a bankruptcy or foreclosure.  It is true that a short sale will negatively affect their credit but not for nearly as long as a bankruptcy or foreclosure.  If the homeowner is facing foreclosure then their credit has already been damaged.  The only decision at this point is how bad is it going to get.  Bankruptcy can affect their credit for up to 10 years and foreclosure for up to 7 years.  A short sale will cause a point drop on the credit report.  But it is not a stigmatism that is attached to the credit report for years to come.  It is a sudden drop in score.  Then the seller can begin to rebuild their score right away.  Most short sales are reported as “settled for less than full payoff” on the credit report for that one account.  Bankruptcy and Foreclosure show up as entries in the public record section all by themselves.

Obviously neither you nor I can profess to be experts in Bankruptcy, only bankruptcy attorneys can claim that.  Notice is said “claim” that.  Unfortunately it is all too common to see a homeowner go to a bankruptcy attorney for advice and be told to file bankruptcy.  There are some attorneys who would never advice against it; it’s their business to file bankruptcies. 

I always ask two simple questions to a homeowner that is considering bankruptcy.

1. Is your mortgage payment too high or are there other bills that are preventing you from affording your mortgage?
2. If you no longer had your mortgage payments would you still be considering bankruptcy or could you afford your other bills and a reasonable rent?

These questions will put the homeowner on the right path to determining for themselves what they should do.

On final note; 

If you have a closing coming up and the seller files bankruptcy you are dead in the water until either that bankruptcy is dismissed discharged or the property is removed either by the trustee or a release from the automatic stay.  Always know what your clients are thinking.  You don’t want that to pop up on you at the last minute.

See you all next week.

Enjoy, and as always Visit the Ask The Expert Page to leave your questions.

Tags: bank, foreclosure, homeowner, lender, negotiate, Real Estate, realtor, seller, Short Sale