Short Sale May Cause Problems
By Kent Anderson, Oregon Bankruptcy Attorney on Jan 7, 2010 in Foreclosure Process
When you sell your home for a price that is less than the total debt secured against the property it is often referred to as a “Short Sale”. Due to falling home prices and booby-trap loans, a short sale is becoming one of the few alternatives to foreclosure. Does it help a hard pressed homeowner or does it cause more problems than it solves?
Many of my clients have told me that they are attempting to sell homes and rental properties they own because they are no longer able to make the payments. They want to avoid foreclosure, and hope to avoid bankruptcy. In some cases, the sale of real estate for less than the amount owed can help to reduce a payment burden and stretch cash flow. However, there are several possible problems that can result from a short sale.
First, a short sale is only possible if the lenders holding a lien on the property are willing to cooperate. In most cases, it is impossible to sell property to a third party with paying all debts secured against the property in full or obtaining a release of the lien from the lender.
Second, a short sale will generate debt cancellation tax if any of the lenders satisfy their debt without being paid in full. The cancellation of debt creates income for the borrower that often results in an increase in tax liability. Under some circumstances, such as when the debt was qualified personal residence debt, and only incurred to acquire or make substantial improvements to the borrower’s personal residence, the cancelled debt may be excluded from income for tax purposes.
Finally, when a second lender is involved in the short sale, they may not be paid at all. The rapid increase in home values during much of the last ten years led to frequent use of the Home Equity Line of Credit by homeowners. If these lenders are not paid when the home is sold, they may release their lien and permit the sale but will want their loan to be paid in the future.
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