Originally Published: 6/13/2012
In many cases, during the process of negotiating a short sale, the lender may have already begun foreclosure proceedings. When that happens, a race begins between the seller and the bank: either the lender forecloses first, thus preventing the short sale, or the seller completes a short sale before foreclosure. Many sellers, even though advised do so, will not secure legal representation for the defense of the foreclosure action, thereby putting the lender in the advantageous position of securing that judgment and foreclosure sale faster than would otherwise occur with a proper foreclosure defense.
Many times a seller will approach us just days or hours before the scheduled foreclosure sale to see what can be done to stop the foreclosure and gain more time to obtain the lender’s approval and complete the short sale. In most cases, when it reaches that point, there is not much one can do except file bankruptcy, to the extent the seller legitimately needs to (and has the right to) file for such relief. As long as the bankruptcy is properly filed prior to the foreclosure sale, and the Clerk of the Court is notified of the bankruptcy, then the Clerk will proceed to cancel the foreclosure sale. The clerk receives notice of the bankruptcy by filing what is called a “suggestion of bankruptcy.”
It is important to keep in mind that after the bankruptcy is filed and discharged, in most cases the debtor will continue to own the property unless the lender secures permission from the bankruptcy court to continue with the foreclosure of the property during the bankruptcy. Many people do not realize that the only thing the bankruptcy ultimately accomplishes is to relieve the seller from personal liability for the debt.
Many sellers contemplating bankruptcy will ask: What is the benefit of continuing the short sale if I’m filing for bankruptcy and will obtain the discharge of the debt? There are two major benefits. First and foremost, a short sale cuts-off potential liability resulting from continued ownership of the property, such as homeowner association fees, code enforcement fees, and liability to persons who might get injured on the property. Again, many people do not realize that a bankruptcy does not end one’s liability for home ownership. The property generally remains titled in the name of the property owner even after a bankruptcy discharge. Second, with a foreclosure, under current FHA guidelines, the Seller is barred for 7 years from qualifying for a new mortgage loan. With a short sale, however, the wait period can be as little as 2-4 years, depending on the circumstances, and the clock begins to run at closing (which is often times much sooner than a foreclosure sale date).
As always, we recommend that anyone contemplating bankruptcy consult with a bankruptcy attorney to discuss their liability for real property post discharge. There is much more at issue, generally speaking, than the liability on the balance of the loan.