FYI: This article was written when short sales were large componets of the market. Today, this is not the case. Thus, this article is more historic information than current. Please consult an attorney for short sale information today as things have changed since this article was written.
Seems like we’ve been writing a lot of articles about short sales in downtown Phoenix these days. The fact is, a lot of the homes for sale in downtown, midtown and north Phoenix. Also, many who want to sell their home have to do a short sale since they owe more than the place is worth.
As part of our short sale education program we found an interesting and scary article on the subject of short sales and bankruptcy. Even if you are not in this situation, the information is worth reading. Knowledge is a good thing.
The article comes from our fiends at Thomson Law Group. They provide a lot of good short sale info these days and helps us, as real estate guys, informed. We send special thanks to Doug Farnham for his valuable knowledge and willingness to share it with us and the readers of Urban Connection Realty. Below is Doug’s latest article:
How Bankruptcy Affects Short Sales & Vice Versa
By now, most Realtors are aware of many of the risks associated with short sales. Either they know someone that has faced litigation or have read about problems that can arise from homeowners that either faced an unexpected foreclosure or who did not understand their deficiency or tax liability.
Recently we have seen a new issue arise for some homeowners that completed a short sale before filing for bankruptcy. The issue of concern is that a homeowner may no longer qualify for bankruptcy because the sale of their home lowered their debt ratio and, thus they became ineligible under the means test 11 U.S. C. 707. The means test compares the income against the expenses or debts of a homeowner and determines whether a homeowner is eligible to seek relief to discharge debt obligations under a Chapter 7 bankruptcy proceeding.
Residential mortgage debts are an expense which can be included in the means test. By including the residential mortgage debt in the analysis, the probability that a homeowner can qualify for bankruptcy is increased. By excluding or eliminating that debt, the probability of the homeowner to qualify for bankruptcy is decreased or, in some instances, eliminated altogether. So, if a homeowner intends to file for bankruptcy, a review of the homeowners eligibility under the means test should be completed by a qualified bankruptcy attorney before a homeowner is encouraged to complete a short sale.
Another concern arises when a homeowner completes a short sale and then files for bankruptcy some years later. Since the lender has up to six years after the close of escrow to file a deficiency lawsuit, it is possible that the lawsuit could come after the homeowner has been discharged from bankruptcy. A bankruptcy attorney may not include the mortgage loan(s) that was involved with a completed short sale if a 1099 has been filed by the lender or if the homeowner fails to tell the attorney of the loans. However, since the legal effect of a 1099 filing upon a homeowner’s deficiency liability is still in dispute under Arizona law, it is recommended that all loans from previously completed short sale transactions be included when filing bankruptcy, even if the short sale was completed several years prior (at least until the 1099 issue has been clearly settled by the courts).
Short sales are on the increase which means that it is a market segment that Realtors cannot ignore. We hope this information helps you to avoid the pitfalls and makes you better prepared to handle these issues.
Gene Urban and Ron Urban
The Urban Connection Realty Team
602-234-5777
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