Short Sale or Bankruptcy


October 31, 2014

Short Sale or Bankruptcy for a Married Couple (and should they file Bankrupt Jointly or Individually)?

Debt problems can create a lot of stress! And almost more overwhelming than the debt itself is navigating through the different “debt solutions.” That’s why it is so important to find the right professional to help guide you. In a recent conversation I had with a local real estate professional. She posed the following question:

What is the benefit of a married couple filing for bankruptcy when the bankruptcy won’t benefit one spouse. Does a short sale make more sense?

As a response, I shared the following information.

First, Every Situation is Different

I have to start with the classic attorney disclaimer because it absolutely holds true: Bankruptcy is very fact specifically, so the answer will vary depending on the prospectively filer(s) income, expenses, assets, debts, and other factors.

Married Couples: Filing Jointly or Individually

A married couple can file bankruptcy either together or with only one spouse filing. Some considerations in evaluating whether to file as a couple or as a married individual include:

  1. how the debts are titled
  2. how the assets are titled
  3. the desire to have one person in the household maintain credit-worthiness

Let’s look at each individual consideration in more detail.

How the Debts are Titled

If the household largely has separated debts, then filing for only one spouse may make sense. Conversely, if the debts are joint, the creditor may pursue a spouse who does not file bankruptcy, so a joint filing may be more appropriate.

How the Assets are Titled

The way that assets are titled can determine what a bankruptcy filer can keep in a chapter 7, and it can influence how much a filer has to pay in a chapter 13 case. For those who are brand new to bankruptcy research, you have to understand that in a Chapter 7 bankruptcy, there are limits to the stuff you can keep; in contrast, in a Chapter 13, you can keep your stuff, but you have to pay into a monthly payment plan.

If most of the household assets are jointly titled (or alternatively, if they are title in the name of the non-filing spouse), then filing for only one spouse may make sense because the filer may actually be able to keep more stuff (or pay less money in a Ch. 13) than if the spouses filed jointly.

A Short Sale and Bankruptcy are not Mutually Exclusive

Another important thing to note is that a short sale and bankruptcy are not mutually exclusive.

When someone files for bankruptcy, the bankruptcy will not transfer the title to any property. So the filer remains responsible for all homeownership responsibilities after the bankruptcy. These responsibilities include:

  • Post-bankruptcy Association dues;
  • Property maintenance;
  • Real estate taxes; and
  • Home liability.

The bankruptcy does, however, protect the homeowner from any monetary recourse in the event that the mortgage company forecloses.

So it can be advantageous to file bankruptcy and then request a short sale because it removes title to the property from the homeowner. Also, it protects the homeowner from any deficiency (which in turn, protects the homeowner from 1099 liability).

Furthermore, I generally find that lenders are easier to work with on loss mitigation options after bankruptcy because they know they cannot get personal recourse from the homeowner.

On the other hand, bankruptcy may not be necessary if a short sale is completed. It will depend on the other debts involved.

Considering Alternatives

If you are facing financial difficulties, it is important to seek help from a bankruptcy attorney right away. Many consumers become overwhelmed by the looming credit damage of drastic events like foreclosure and bankruptcy. This might lead them to put off a discussion about their debts. Often times, though, there are alternatives that might help avoid–or mitigate the damages of—foreclosure or bankruptcy.

If you are experiencing financial hardship, let me know. Fill out the form to the right and we’ll discuss your options in a free consultation.

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