One of the questions I receive on a regular basis goes something like this: “I’m going to be filing bankruptcy. Should I just let the house go into foreclosure? Will a short sale help instead? When should I file bankruptcy?” As you can see there are multiple moving parts so let’s break them down.
In Minnesota, most foreclosures are done “by advertisement”, which means that a sheriff’s sale is scheduled. After the sheriff’s sale, you have 6 months to “redeem” the property by getting a new loan or paying it off in cash.
Many Minnesota bankruptcies are Chapter 7 in which the debt is forgiven or cancelled. If you file for bankruptcy during the short sale/foreclosure process, the bankruptcy process effectively halts the short sale/foreclosure process until the bankruptcy is discharged and the debts forgiven. The foreclosure process will usually begin 6 months after the final discharge of debt.
I’ve had a couple of clients get talked into bankruptcy during the short sale/foreclosure process, which flies in the face of reason. Here’s why: Because the bankruptcy halts the short sale/foreclosure process, the mortgage debt can still be hanging out there AFTER the discharge of the other debts.
This can happen in a couple of ways. If you are living in the home and you abandon the property, the lender can move from a foreclosure by advertisement (sheriff’s sale) to a foreclosure by action. In a foreclosure by advertisement, when the property goes back to the lender, they can no longer pursue you for the remaining amount. However, if it is a foreclosure by action, they can pursue for the remaining amount.
As most properties have a second loan, the second lender can pursue the borrower in either foreclosure process.
Here’s the bottom line – try to do a short sale first, especially if you have two loans. We are usually successful in getting both mortgages satisfied with a short sale. After the short sale, declare bankruptcy. Your credit will take a hit from the late payments and discharge of debt, but you won’t have a foreclosure on your record. (See my other article on “Foreclosure vs Short Sale”
If your best course of action is to stay in the property as long as possible without paying, then it seems to be in your best interest to allow the lender to foreclose. If there is a second loan, put that loan on the bankruptcy “pile” and have it discharged. While your credit is taking a couple of big hits, at least you have a fresh start.
As you’ve read, there are lots of moving parts to these transactions. Please contact me if you want more information as we can discuss all of the options. That said, declaring bankruptcy is a difficult decision and you should always be professionally represented. If you don’t know someone, I have recommendations for you.
Remember my short sale services are paid for by the lender, not you. I want to make sure you have good information and knowledge so you can make good decisions. A short sale may or may not be the best option for you. Whether you use me or not, get your questions answered before signing anything.
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