Foreclosure Proceeds

Many homeowners facing foreclosure seriously consider a short sale as a way out of their mortgage and a way to avoid foreclosure .  When a homeowner does a short sale on their property they are selling the property for less than their mortgage balance and probably for less than what the house is really worth. They avoid foreclosure and someone else gets the house for cheap.

However, there are three good reasons why doing a short sale may not be such a good idea:

  1. You may end up owing a large sum of money to the mortgage lender even after you sell your home.  While you will avoid foreclosure, the mortgage lender may sue you for the balance of the mortgage. Yes, some mortgage lenders will forgive the balance of the mortgage; but they are not under any legal obligation to let you off that easily.
  2. If the mortgage lender forgives the balance of your loan, you may owe taxes on the forgiven debt. One of the great benefits of bankruptcy is that debtors never pay taxes on the debt that is forgiven during bankruptcy. On the other hand, when debt is forgiven outside of bankruptcy, the debtor may owe a hefty tax bill.
  3. You still owe other bills.  While avoiding foreclosure via a short sale can be an effective tool, it doesn’t get rid of your other debt.  Most debtors facing foreclosure are in their situation because they have too much debt and a mortgage is just one of those many debts. A short sell does not make those bills go away. Before you sell your home via a short sale please think about how much impact it will have on your overall financial situation.  Is your home’s mortgage the number one financial problem or do you have other debts that are eating away at your income?