Would a short sale or foreclosure be better before bankruptcy?

[jyrim]

We are currently trying to sell two homes through short sales. Two and a half years ago we purchased another home before selling our home first. Unfortunately, the old house did not sell and we used our entire savings over the next 18 mths trying to keep both houses current. Our business was also heavily impacted by the recession and we ended up with about 30k of credit card debt trying to keep the business going. We opted to move back to the old house and sell the new one in a short sale. Business continued to slow and we decided to close the business and relocate for a better job, with hopes of selling the old home this time in a short sale.

We have a short sale offer on the new home, however the 2nd is requiring a 35K promissory note (we owe 96K) and the 1st will not release the deficiency. What is more troubling is under state law, the first has 90 days after foreclosure to pursue deficiency, but with a short sale that right is extended to 5 years. We just want to get this all behind us and bankruptcy is an option, but we are confused as to when we should file. Should we let both houses go in foreclosure and wait to see if the lenders pursue us for deficiency? Is there any benefit to a short sale for us?

[StartingOver08]

The benefit of a short sale in your situation is that the deed will be transferred out of your name much more quickly than if you go through the foreclosure process or the BK process. In the BK process you can surrender the home, but the deed still stays in your name until the lender finishes the foreclosure.

If you file BK after your short sale closes, naturally the note and any other deficiency will be discharged in a successful BK. So you get your cake and eat it too!

[jyrim]

It seems like it would work that way, but wouldn't signing the promissory note while we are considering bk be considered fraud? Like running up cc debt before filing? We are trying to look at every angle. Thanks!

[StartingOver08]

I think that is a question that can best be answered by an attorney. It seems to me that the lender/servicer is forcing the note on you in exchange for accepting the short sale - so can that be considered duress? I don't know.

Look at it this way, sometimes you can get a short sale approved without a note at all. In fact, I just closed one today where there was no seller note required by the lender. If the lender does require a note, they usually offer it as 1) pay x at closing lump sum or 2) sign a note at 2x payable over y yrs and zero interest and 3) we won't do the deal without the note or lump sum. I have been able to negotiate with the buyer to pay the lump sum due at closing and then you will have no note to sign. This depends directly on the contract value in relation to the market value and if the buyer is capable of putting up those extra funds.

Do you have a BK attorney that you can ask that question? Or a real estate attorney you know and trust? Maybe someone on this forum will know the definitive answer.

[JustFileSuit]

[QUOTE=StartingOver08;362528]

I think that is a question that can best be answered by an attorney. It seems to me that the lender/servicer is forcing the note on you in exchange for accepting the short sale - so can that be considered duress? I don't know.

It is not "duress" as there is no obligation on either you or the lender to do any new deal. You already did a deal and that deal was put to bed. Now you are approaching the lender to in effect do a new deal, and either one of you can propose terms. You accept his terms or you decline. He accepts your terms or he declines. End point: no duress.

"Duress" is when you have signed a contract and put down say $25,000 as a non-refundable deposit, and have a commitment from a lender to provide the rest of the financing by date certain. then at 9:30 P.M. on the night before the closing, the lender comes up with some new term, say a penalty clause, and either you sign it or he does not provide the financing. So you sign because you will lose your $25K deposit to the seller - and the lender knows it. The lender (not the purchaser) has put you "under duress."

[JustFileSuit]

[QUOTE=jyrim;362399]

It seems like it would work that way, but wouldn't signing the promissory note while we are considering bk be considered fraud?

Short answer: No.

There are Statutes passed by Congress that any resident can avail himself of at any time, pursuant to the parameters of that Statute. The lender knows that full well and has factored that into his plans. Remember: if you File, his claims do not evaporate. He and his claims become creditors within the BK estate. You have not defrauded anyone; you have placed your debts and your assets before a Court for administration.