Short Sales and Bankruptcy in Los Angeles: Debtor Beware
Many potential Bankruptcy filers are under the impression that a Short Sale is always a better option than a foreclosure or a bankruptcy. However, this is often a bad option for debt relief and here's why.
The main problem with a short sale is that it can very likely be a taxable event, which means that a short seller may have to pay taxes on the amount of loss to the bank on the sale because the IRS will treat that as income to the debtor. There are some recent exceptions that have been passed, but it is not automatic, and you must qualify for these tax implications of a short sale. What often happens is that a person close to Bankruptcy who is trying to avoid it by doing a Short Sale gets pushed there anyway because of the unanticipated future tax burden.
So, why do people think a short sale is so much better than a foreclosure or bankruptcy? Because they think that the credit hit is far less, but in reality, it may actually be worse than a bankruptcy and no better than a foreclosure. The irony is that a bankruptcy gives future creditors greater security because they know you will not be declaring bankruptcy again for many years, making you a safer bet than a short seller who still has the bankruptcy option looming.
As far as a foreclosure is concerned, there is very little difference between a foreclosure and a short sale when it comes to taking a credit hit. What is worse is that you will be taking on costs involved in a short sale that simply won't exist in a bankruptcy. To put it another way, you are making money for the realtor, while you are losing the advantage of staying in your home for free for several months under the foreclosure/ bankruptcy process.
The bottom line is this: If you are going to file a Bankruptcy anyway, it is probably wise to avoid a Short Sale. By surrendering the home after the Bankruptcy is filed, there will be no taxable event (assuming no significant equity), you will not waste the money to process the short sale, you will have "free rent" for several months, and the credit hit will be no worse for you in the eyes of future creditors.
As a Pasadena Bankruptcy Attorney, I can help you plan the best strategy to get you out of debt and on your way to a fresh start during these difficult economic times.
-Kirk Laron
