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You may be facing foreclosure if you cannot afford your mortgage payments. However, you might consider a short sale instead of allowing your home to go through foreclosure. In this blog, our Massachusetts bankruptcy lawyer discusses the difference between a short sale and a foreclosure.
Understanding the Basics: Short Sale and Foreclosure Defined
A foreclosure is a legal process a lender goes through to have a home sold to pay a secured debt. For example, if you fall behind on your mortgage payments, the mortgage company files a foreclosure complaint. If you do not have a legal defense or pay the debt in full, your home can be sold at a foreclosure sale. The proceeds are paid to the mortgage lender.
A short sale occurs when you sell your home for less than you owe to the mortgage company. The mortgage company must agree to the short sale. A mortgage company may agree to the short sale to avoid the cost of a foreclosure action. Also, the lender does not have the expense of securing, listing, and selling the home after a foreclosure sale.
Why Homeowners Might Consider a Short Sale
A homeowner may opt for a short sale when they cannot pay their mortgage payments, and there is not enough equity in the home to pay the loan in full. The short sale avoids a foreclosure action on their credit history. Sometimes, the mortgage company will waive the remaining balance owed on the home, so the homeowner walks away without owing any money to the lender.
The Process and Implications of a Foreclosure
The foreclosure process is the same, but the timeline can vary. Lenders decide when they want to proceed with a foreclosure sale. Generally, a mortgage company does not begin a foreclosure action until a person is several months behind on their payments. However, the company could technically begin the process once the loan is in default (your payment is past due).
The company must send you a Notice of Right to Cure. The notice explains that you are behind on your payments and gives you a date to bring the payments current. If you do not pay the past due payments by that date, the loan is accelerated (due in full). The lender may obtain a judgment from the Land Court ensuring that you are not a member of the military.
The bank schedules a sale date once the loan is accelerated and the Land Court issues an order. You are given notice of the date of the sale. The home is sold at a foreclosure auction. If you remain in the home after that time, the new owners can file eviction papers.
How a Short Sale and Foreclosure Affect Your Credit Score
A short sale usually affects your credit score for three to five years. However, a foreclosure can stay on your credit history for seven years. A foreclosure is one of the worst marks a person can have on their credit report. Until the foreclosure falls off, it could prevent you from obtaining certain types of credit.
Legal Consequences: Short Sale and Foreclosure
The legal consequences of a short sale and a foreclosure differ. Both processes result in the loss of a home. However, short sales may have less of a financial consequence. If the foreclosure sale does not pay the loan in full, you are responsible for the remaining balance or deficiency.
The same applies to a short sale unless the lender waives the deficiency. However, if the lender waives the deficiency, the amount could be considered taxable income unless it can be excluded.
Why Consulting With a Massachusetts Bankruptcy Attorney Can Make a Difference
Filing bankruptcy could be better than a short sale or foreclosure. When you file a Chapter 7 or Chapter 13 case, you can discharge the deficiency amount if your home is sold. Filing bankruptcy can prevent a foreclosure action from appearing on your record.
Depending on your situation, a Chapter 13 bankruptcy could help you save your home. You can catch up on the past-due mortgage payments through the Chapter 13 plan.If you have financial problems, call Logan A. Weinkauf, P.C., to speak with our Massachusetts bankruptcy attorney. Let’s review your options for debt relief to determine which option gives you the best financial footing to recover and move forward.