Should I do a short sale, deed in lieu of foreclosure, and if so, should I file a Chapter 7 Bankruptcy before?

Asked about 3 years ago - Woonsocket, RI

I have had my house on the market for almost a year (i. I had thought that I had $50,000 in equity on my home. Unfortunately, based on the comps, my house is actually worth about $40,000 less than the mortgage. I have had the property listed as a short sale for a good amount of time (with no luck) and just want to hand the keys over to the bank, have the title transferred from my name to the bank, and not have to pay a deficiency.

Due to unnecessary litigation, lawsuits, job loss, rise in mortgage payments, however, I have lost control over my finances. As a result, I urgently need to file a Chapter 7 Bankruptcy. Should I file before or after speaking to the bank about a deed in lieu or does it matter? I also will be getting married in 3 mos and wish to come into marriage with less debt

Attorney answers (5)

  1. 6

    Lawyers agree


    Answered . If you file Chapter 7 (assuming you otherwise qualify), the issue of the home can be resolved for you. In bankruptcy, you can simply choose to surrender the underwater real estate and walk away. Any deficiency is discharged just like your other debts, so there is no need to go through the legwork of a short sale or deed in lieu.

    On the other hand, you will remain on the deed to the home until the mortgage company chooses to foreclose. So you could incur post-petition expenses such as association dues, insurance, utilities, etc. However, you can continue to live in the property until foreclosure actually happens. In some jurisdictions, that can be a long process, so you could potentially live rent-free for a while.

    Contact a bankruptcy attorney in your area to see what options work best for you.

    Attorney Jay Perez is a Managing Attorney with Macey Bankruptcy Law, a national consumer bankruptcy law firm. His... more
  2. 5

    Lawyers agree

    Answered . I agree that if you are going to file Chapter 7, and can qualify to do so, then you have no reason to deal with discussions of short sales, deed in lieu, or deficiency issues with your lender. Once you file successfully, then the bank can choose to lift the automatic stay to foreclose on the property. if they do, you would already be insulated from any deficiency issues by having filed bankruptcy regarding that debt.

    It is sometimes amazing to hear the stories about how your credit can improve after filing bankruptcy. Some lenders are happy to extend you credit after bankruptcy as they know that you cannot file again for 10 years and that you have much better debt to income ratios. If you are getting married and want to start fresh, then by all means contact a local bankruptcy attorney and talk through your options.

    Disclaimer: This answer is provided for informational purposes only, does not constitute legal advice, and does... more
  3. 5

    Lawyers agree

    Answered . This is an excellent question and one that is asked by clients on a regular basis. I am not a fan of short sales or deed in lieu, but that is usually because my clients have larger problems. If your sole problem was the house, then a short sale might be a good a solution. However, the mental energy required to complete a short sale or deed in lieu is formidable and of minimal value if you will still have substantial debt when the process is completed.

    We generally recommend chapter 7 to our clients in your situation. However, every situation is different and you should consult with a local attorney before making any decision.

  4. 1

    Lawyer agrees

    Answered . The answer depends on your entire financial picture. If the house was your only problem a deed in lieu might be the solution. Otherwise bankruptcy might be the best option. Please consult with a qualified attorney.

    I would be happy to speak with you should you wish to contact me directly. Don't try to do this by yourself.

  5. 1

    Lawyer agrees

    Answered . You can file a Chapter 7 prior to dealing with the house, but I would certainly consider a short sale. The Chapter 7 trustee may try to pursue a short sale, which is fine, but if they don't, you should consider it too, once the case is done. This is because of the impact a foreclosure has on your credit, which is actually worse than a bankruptcy. You could also look into deed-in-lieu, especially if your lender is willing to report it as a short sale rather than a foreclosure (only some lenders will do this).

    The effect on your credit of a foreclosure is worse than a bankruptcy, and for a longer time. As was noted, your credit can recover fairly quickly from a bankruptcy. You will probably be able to qualify for a new home loan within a few years time. If there is a foreclosure, however, that time is much longer.

    I know that your credit score is likely one of the last things on your mind right now, but given the long-term implications, you should consider an alternative to foreclosure, if you don't mind dealing with the property for a little longer.

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