SHORT SALE vs. FORECLOSURE AND BANKRUPTCY
It’s more important than ever to ensure that your credit score remains strong. Foreclosure and bankruptcy are two of the worst events to happen because they lower credit scores by so many points. The negative credit rating stays with the borrower for 7 or more years. This affects the borrower’s ability to rent a place to live, get credit, buy a house, obtain security clearance and even qualify for a job in some cases. It is well worth your time and energy to explore alternatives and to prevent foreclosure and bankruptcy from scarring your credit report.
One strategy to avoid foreclosure is to sell your property as fast as possible and before a lender can complete the foreclosure sale. Keep in mind, though, that the foreclosure can be completed very quickly in certain situations. For that reason, it’s important to act quickly.
Through the short sale process, home sellers have the chance to be released from all financial and legal obligations by every single lien holder. The same opportunity does not exist in a foreclosure or bankruptcy.
Junior lien holder rights are not extinguished by a foreclosure. Under Washington law, a junior lien holder keeps its rights to collect the full amount of the debt from the borrower, even after a non-judicial foreclosure. This means the junior lien holder can obtain a separate judgment and pursue collection of the debt for many years to come. Only through a properly negotiated short sale does a borrower have the ability to prevent that from happening.
To qualify for a short sale, the following must exist:
- Seller owes more on the mortgage loans than the home is worth
- Seller experienced a verifiable hardship that caused a monthly shortfall (i.e., job or income loss, divorce, military service, serious illness, family tragedy, etc.)
- Seller is insolvent and does not have sufficient assets to continue paying the mortgage
- Seller must be motivated to sell and committed to the short sale process
| SHORT SALE | FORECLOSURE or WALKING AWAY | BANKRUPTCY CHAPTER 13 | |
| Waiting period to reestablish credit and obtain a loan from Fannie Mae | 2 years | 5 - 7 years | 5 - 7+ years |
| Negative impact on credit score for 7+ years |
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| Ability to negotiate NO harm to credit score |
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| All lien holder rights can be extinguished |
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| Chance to avoid a collection lawsuit after the sale |
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| Senior lien holders can file a lawsuit against you, obtain a judgment and enforce it |
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| Junior lien holders can file a lawsuit against you, obtain a judgment and enforce it |
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| Makes it almost impossible to obtain credit, consumer loans and home loans for many years |
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| May hurt your chances of qualifying for a job, renting a home or getting security clearance |
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| Possible tax consequences for debt forgiven |
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| Can help to avoid Bankruptcy |
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| Increases the risk of Bankruptcy |
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The information contained in this document is provided by Hochman Legal Group, PLLC for informational purposes only. It is not intended to be and should not be construed as legal advice or representation. Consult tax and legal professionals for advice about your specific situation. Reproduction or use on a website or in marketing materials is not allowed without written permission.
