Q&A: Bankruptcy "Stay" and Short Sale Listing

Q: We have not been able to keep up our mortgage payments and finally decided to list the house for short sale so maybe we can save our credit by not having a foreclosure on our record. Nobody seems to be buying houses in our area and several folks have said we just need to go ahead and file bankruptcy but keep the house out of it. Is this possible?  We don’t want to make a mistake while trying to resolve this issue.

A: You can’t file bankruptcy and ‘keep the house out of it’. The house is an asset and the Trustee of the court will ultimately decide what will be done with any and all assets. The closing of a short sale can not be completed while a home is still in bankruptcy. Only after the Trustee has made a decision to allow removal of the home from the petition and allow it to be placed (or put back) on the market should this be done.

If a borrower has a home listed for a potential short sale and then files for bankruptcy protection an “automatic stay” goes into effect as soon as the bankruptcy is filed. The “stay” means several things. Including;

1. All creditors are prohibited from calling or harassing the borrower until there is a disposition of  the bankruptcy
2. All assets are “frozen” until the court has made a decision about what is to be done with them
3. All loss mitigation discussions must cease until the bankruptcy is completed (that includes a possible short sale)
   

Deed-in-lieu dilemma

For the reason just discussed, a person who believes they might be able to complete a short sale would be ill-advised to file for bankruptcy protection since it blocks this option. Additionally, since the Trustee of the Bankruptcy court might order a deed-in-lieu (forcing the person to relinquish the house) you should make this your last, last option.

You relinquish any control of the situation by filing bankruptcy. Additionally, there is the possibility that if you are required to sign a deed-in-lieu of foreclosure that you might later be faced with a deficiency judgment which you might have negotiated away if you had worked directly with the lender to complete the short sale.

I would encourage you to work aggressively with your real estate agent and your lender to try to get the short sale approved. In the meantime, stay in your home, no matter how far behind you are in the mortgage payments.  

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(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have! We appreciate all comments and feedback, so please don't be shy.)