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Short sale better than bankruptcy?

Chris Diaz is the founder of Charis Financial, Inc. He has over 14 years experience in helping homeowners with their mortgages and has closed hundreds of short sales over the last 3 years. His website is www.charisfinancialinc.com. Send questions to moneymatters@ocregister.com; reference “short-sales” in the subject line.

Does bankruptcy save my house from foreclosure?  Is there anything else I should know about it?
– Tara in San Clemente

Hi Tara,

The answer to that question is both yes and no.  In this ever shifting market, lenders are constantly updating their policies to figure out how to lose as little money as possible.  It should come as no surprise that we see banks being more aggressive towards people in bankruptcy since we’ve already seen a drop off in the number of modifications being approved as well as a stricter set of guidelines (and timelines) as they relate to short sales.

To answer your first question, yes, a lender stops the foreclosure process if you decide to file for bankruptcy.  A couple of years ago, a discharged bankruptcy was basically a license to start over with your bank because they would pretty much leave you alone until months afterward.  However, like with most things, we now see the banks taking a stricter approach towards how they treat those in this process.

Please keep in mind that I am not an attorney and am not giving legal advice, I am simply addressing some important things to be mindful of, in a very basic, easy to understand way.

A bankruptcy acts as a kind of restraining order against your lender.  However, your lender doesn’t want to be blocked from being able to foreclose on you because they want to take possession of the house so they can turn around and sell it.  What they do, to enable themselves to not have to wait until your bankruptcy is discharged, is to file a Motion for Relief of Stay.  Once they file this and it’s granted, it lets them continue whatever they were trying to do prior to your filing.  In this case, they could pick the foreclosure up right where they left off.

The biggest thing to be mindful of with this scenario is that you will now have a foreclosure and a bankruptcy on your credit report.  That is not something that I would ever want on my credit as these are two of the worst possible items that are reported.  This is why it is so important to seek advice from people who know what they’re doing.  Most attorneys are pretty good at explaining the legal part of any communication that you’re getting while the bankruptcy is in process but how do you avoid the foreclosure?

About half of our clients who are in active bankruptcy have lenders who have filed these motions which is way up from what we were seeing a couple of years ago.  To me, this signifies a trend by lenders who are acting with greater urgency to reclaim their assets.   The only way I have seen a lender not foreclose on someone after relief has been granted to them, is when the homeowner is in the short sale process with a qualified buyer ready to purchase the house.

One could argue that I’m saying that because it benefits me.  Well, it may, but that doesn’t make it an untrue statement.  A short sale does present an alternative to foreclosure and can be used to develop a strategy that helps you recover from your hardship the quickest.  My advice is to find someone who has a proven track record of successful closings to help you develop the strategy that is right for you.

 

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