Complete Short Sale or Foreclosure if Filing BK?

[Dancer]

My DH's house is underwater. We've found a buyer but the bank wants DH to sign a huge promissory note which we won't sign. The attorney is recommending that DH file and thinks he will qualify for a Chapter 7.

I asked the attorney whether we should continue to pursue the short sale or let the house go in foreclosure. She recommended finalizing the short sale but not signing the promissory note.

However, now I'm worried about DH not passing the means test and ending up in a chapter 13. As I understand it, the difference between the short sale amount and the mortgage value would become an unsecured debt. Which means that if he goes into a Chapter 13 after the short sale he could have to pay some of it back through the plan.

If he lets it go into foreclosure there wouldn't be a deficiency until after he files the BK. He would surrender the house and let them foreclose. I understand that we would be on the hook for the HOA and the insurance until the foreclosure sale happens.

Here's where I am really confused. What goes into the plan if he files for BK Chapter 13 and surrenders the house and doesn't reaffirm the mortgage and then the foreclosure sale occurs and there is a deficiency. Does the deficiency go into the plan at that time?

Sorry if this is confusing, but am I right that there might be an advantage to foreclosure versus a short sale if he files a Chapter 13?

[Dancer]

What is making me nervous here is reading some horror stories about people who thought they qualified for a 7 and ended up in a 13.

I've been through the online means test myself a few times and it looks like DH will pass but I still worry.

[LadyInTheRed]

However, now I'm worried about DH not passing the means test and ending up in a chapter 13. As I understand it, the difference between the short sale amount and the mortgage value would become an unsecured debt. Which means that if he goes into a Chapter 13 after the short sale he could have to pay some of it back through the plan.

That should only be a concern if your husband would be in a 100% plan. If the attorney thinks he will qualify for a Chap 7, then I assume he would not be in a 100% Chap 13 plan. If he did have to file a Chap 13, the plan payment would be whatever your husband's disposable income is. If the mortgage holder files an unsecured claim for a deficiency, that just means the other unsecured creditors get less than they otherwise would have.

Sorry if this is confusing, but am I right that there might be an advantage to foreclosure versus a short sale if he files a Chapter 13?

Why would he file a Chap 13 if he qualifies for a 7?

Doing a short sale before filing could make it harder to qualify for a Chap 7 because he wouldn't have the mortgage payment as a deduction on the means test. But, if the mortgage payment is low, the allowable rental expnse may be just as high as a mortgage expense. If he doesn't do a short sale, you could wait a long time for foreclosure and those HOA fees and insurance premiums could add up. Why do you doubt he will qualify for a 7? Does the attorney have any doubts?

What is making me nervous here is reading some horror stories about people who thought they qualified for a 7 and ended up in a 13.

I've been through the online means test myself a few times and it looks like DH will pass but I still worry.

Stop worrying unless there is a good reason to worry. Are there similarities between your husband's case and those other peoples' that give reason for you to worry?

[Dancer]

Thanks for the response.

The issue with the 7 versus the 13 is my earnings since I will not be included in the filing. My last paycheck will probably be in mid June. Based on my calculations, it appears that I will be able to exclude almost all of my paycheck as a marital adjustment. If that is the case, he should be able to file a 7.

My last paycheck will be very large due to stock options so will skew the 6 month average so we either need to file before that last check comes or more than 6 months after it comes.

The attorney believes he will pass the means test but I'm not sure how much she has looked at our expenses yet.

[LadyInTheRed]

If he has to wait 6 months, it's worth waiting to qualify for a 7.

[Dancer]

If he has to wait 6 months, it's worth waiting to qualify for a 7.

I agree and I think we need to consider stopping the short sale until we've run all of the numbers. I'm also worried that the attorney might have a conflict of interest since she is working on the short sale and the bankruptcy.

DH definitely can't pass the means test with my earnings and no mortgage.

[LadyInTheRed]

I don't know why there would be a conflict of interest. Does she or another client have soemthing to gain if your husband goes through with the short sale? Did she tell you why she recommends the short sale? I'm assuming it is to get rid of the HOA fees and insurance. I suggest you ask her to run the numbers before making a decision on the short sale. Or, if you don't trust her, consult with more attorneys.

[Dancer]

She said it was to get rid of the HOA and the insurance. I wondered if she had a conflict of interest since she is the attorney working on the short sale as well as the bankruptcy. I assume she wants to get paid for both the work on the short sale and the work on the bankruptcy.

[LadyInTheRed]

If the desire to earn fees was a conflict of interest, than no attorney could ever get paid. An attorney has an ethical duty to advise their client based on the client's best interests. A good attorney will advise a client when the attorney fees required to take one course of action is more than the value of the results. If you are concerned about attorney fees, ask for an estimate of fees before the attorney does any work and then ask the attorney to let you know if it appears at any point that the fees will exceed the estimate. Don't assume an estimate is a flat fee unless it is stated in a fee agreement.

If you and your husband think the attorney is advising a course of action in order to earn a fee, than your husband should find a new attorney who he trusts.

The question of whether to proceed with a short sale may be moot anyway if the lender is not willing to approve a short sale without your husband signing a note for the deficiency.

[Dancer]

If the desire to earn fees was a conflict of interest, than no attorney could ever get paid. An attorney has an ethical duty to advise their client based on the client's best interests. A good attorney will advise a client when the attorney fees required to take one course of action is more than the value of the results. If you are concerned about attorney fees, ask for an estimate of fees before the attorney does any work and then ask the attorney to let you know if it appears at any point that the fees will exceed the estimate. Don't assume an estimate is a flat fee unless it is stated in a fee agreement.

If you and your husband think the attorney is advising a course of action in order to earn a fee, than your husband should find a new attorney who he trusts.

The question of whether to proceed with a short sale may be moot anyway if the lender is not willing to approve a short sale without your husband signing a note for the deficiency.

Based on my DH's conversation with the paralegal, he thinks that the bank is going to approve the short sale even if he does not sign a note. Does that make sense?

If the short sale closes and DH does not sign a note, how long could he wait before filing? This is a recourse state.

I think the timing of when he files is going to be critical. I'm working through our income and expenses this weekend and our average earnings significantly exceed the median because we both received bonuses in March. I've read about Lanning and how it should allow us to pro-rate the bonuses but it seems that it would be easier to file using 6 months of income that do not include the bonuses at all.

It seems like stopping the short sale and letting the house go into foreclosure gives us more time before DH has to file. Does that sound right?

ETA - the more I think about this the more obvious it seems to me that the short sale was a huge mistake. One of the attorneys we spoke with told me "short sales are for suckers." I wasn't ready to hear that a year ago but now I think he's right. I don't think pursuing a short sale has helped us at all.