Bankruptcy? Foreclosure? Short Sale?

Many potential clients want to know whether they should file bankruptcy before, during, or after the process of getting rid of a home. This is a very common situation right now in Las Vegas.  Chapter 7 “Liquidation” bankruptcy doesn’t affect secured debts like home mortgages and car loans, but can get rid of debt left over from a home that has been lost (“deficiency” debts).  Once the home is sold, surrendered or auctioned this debt becomes unsecured by the title of the home and can be dismissed by a bankruptcy.

Although each situation is different, generally the order of preference to get rid of a home is

1. Short sale with an arrangement with the lenders to not have a deficiency debt.  Effective but difficult to arrange if there are two lenders.  Sometimes the second mortgage lender will accept a nominal settlement amount.
2. Deed in lieu of foreclosure (surrender to the lender) with an an agreement to not have deficiency. This doesn’t work with separate lenders on 1st and 2nd mortgages.
3. Chapter 7 Bankruptcy with surrender in plan.  During the bankruptcy proceeding the surrender of the home can be arranged, and it can eliminate the unsecured deficiency at the same time.
4. Foreclosure… and then waiting to see if they the lenders come back for the deficiency.  The downside is that the deficiency will sit on your credit for years, and likely be sold off to zombie debt collectors who will re-emerge after years to harass you.  If they do, then we can resort to a bankruptcy.