This has been a nagging question for many people faced with a house that is “under water” (not literally, though unfortunately some homes have been literally under water due to Hurricane Sandy recently). By “under water” I mean that more is owed on the home than it is worth. Some homeowners, faced with job loss or a mortgage interest rate that increased, can’t afford the payment anymore, and cannot refinance. The homeowners are left with a tough choice and may decide to “walk away” from the house. But, will you be able to buy another house later? How soon? What you decide to do with your house could determine the answer to those questions

In some cases, the homeowner can try to sell their house short (for less than what is owed), or do a “deed in lieu” of foreclosure (meaning instead of foreclosure). But, there still may be tax consequences on any amount forgiven, and, in either case, the bank would have to approve any deal. Also, the bank may not forgive the remainder of the debt.

In other situations, the homeowner may be better off filing a Chapter 7 Bankruptcy to eliminate any potential deficiency on a short sale or foreclosure. Then, once the bankruptcy is complete, the homeowner could still decide to sell the house at a short sale.
What is the advantage to going through the effort to sell the house, when the bank can’t pursue you, the homeowner, for a deficiency?

There are at least 3 advantages:

1. It can help you buy another house sooner. (most sources indicate that the FHA waiting period after bankruptcy and short sale is 3 years, and for bankruptcy and foreclosure up to 7 years)
2. It relieves you of the responsibilities of keeping up your house, and getting city ordinance violations until the bank goes through the whole foreclosure process and actually is the owner of the house.
3. Once the home is sold, you are no longer responsible to pay homeowners’ association dues. (but you do have to pay them after the bankruptcy case is filed.)

The FHA website shows its guidelines f or credit problems when buying a home

http://www.fha.com/fha_requirements_credit.cfm

It is important to know that you must discuss all of the consequences of short sales, bankruptcy, and foreclosure with real estate and bankruptcy attorneys, as well as a good accountant. Because everyone’s situation is unique, and the financial considerations are different for everyone, “one size” does not fit all people.

Call us for a free one-on-one consultation to review your situation. We have offices in Chicago, Oak Lawn, Skokie and Waukegan, Illinois.