A common question is whether someone should short sale their home to avoid the Minnesota foreclosure process. A “short sale” is a sale of your home in which the proceeds from the sale are less than what is owed on the mortgages, however the mortgage company allows you to sell the home and agrees to release their lien anyway. Often mortgage lenders agree to a short sale in order to avoid their own costs of conducting a foreclosure.
A frequent misperception is that short sale releases a homeowner from the obligation to pay difference between the sale price and the balance due on a mortgage (also called the “deficiency”). Not only does a short sale impact a credit report in the same manner that foreclosure does, but homeowners may receive a 1099-C and owe taxes on the deficiency “income” or, worse yet, the short sale deficiency may not be forgiven and a lender may pursue a deficiency judgment in court. While Minnesota is an anti-deficiency state that precludes first mortgage lenders from obtaining deficiency judgments against homeowners in foreclosure in most instances, this statutory protection against a deficiency judgment only applies to first mortgages and only if the home actually goes through the foreclosure process. Since short sale circumvents the Minnesota foreclosure process, Minnesota’s anti-deficiency statute does not protect a homeowner from liability on a mortgage deficiency after short sale.
If you are considering bankruptcy, going through the short sale process may be unnecessary in many instances. A short sale typically benefits multiple parties except a homeowner facing bankruptcy: the mortgage lender doesn’t have to pay the costs of foreclosure including attorney and court fees, the realtor gets a commission on short sale proceeds, and the purchaser gets a good deal on the home. However, since bankruptcy typically has the effect of discharging the deficiency on an “upside down” mortgage, going through the arduous process of a short sale is not only arguably futile if you are going bankrupt anyway, but often can actually complicate the bankruptcy process too.
Each homeowner’s situation is unique and if you are considering a short sale of your home—or even if you are already in foreclosure—and want to know the effect of bankruptcy on the short sale process, you are encouraged to get more information on your rights in foreclosure and bankruptcy. In some instances, bankruptcy can help you save your home, or at least stay in your home for months longer than you could otherwise.
Wartchow Law Office helps people chose their best bankruptcy option with regards to their homeownership situation and other objectives in Chapter 7 or Chapter 13. Contact attorney Lynn Wartchow for a free evaluation of your bankruptcy options.