Foreclosure/bankruptcy or short sale/bankruptcy?

[worthy]

I hate that I'm even here asking this, but I would like some input.

XH and I divorced earlier this year.  As a condition of the divorce, the court requires us to dissolve joint assets.  Neither of us can buy the other out of the house, so we have to sell it.  Our house is underwater and there is no hope of selling it for what it is worth. 

The kids and I live in the house.  XH has moved out of state.

My realtors and local housing counselor are advising me to go with a short sale from the start.  The bank we are working with won't commit to forgiving any deficiency, and it is likely that we'll be on the hook for $20K or more.  We thought we could potentially avoid a deficiency via a short sale, but it looks like that will not be true.  The complicated part is, we have two mortgages.  The first would likely be covered and/or forgiven.  The second would not ($20K).

If we end up with that kind of deficiency, XH is planning on filing bankruptcy.  Because we have joint debt, I believe I will have no choice but to also file bankruptcy if he does (anyone know?).  If we go the short-sale route, we know that I will have to be out of the house by Oct 1st (it will officially go on the market July 1st per divorce agreement and realtor contracts, and the bank we are working with only gives 90 days for a short sale before doing deed-in-lieu or foreclosure.)

But my friends who went through this a couple of years ago are advising me to meet with a bankruptcy lawyer and consider going the foreclosure/bankruptcy route from the start.  They believe that it will be better for me and my family to do it that way -- that it will allow me to stay in the house longer while we figure out where we are going next, and save us money in the process, as well as the boatload of stress that goes along with a short sale.  I'm in the process of getting an appointment with a lawyer.  My friends said if you start foreclosure and then file bankruptcy the foreclosure gets put on hold until the bankruptcy is finished, and you have more time and less stress with the same result.

The end result will be, we will be moving out of our house and we'll have significant debt that will result in bankruptcy.  Our credit will be shot, and we are expecting this no matter what the path or the outcome.  It sounds like a foreclosure will let us stay in our house longer, cost us less, and be less of a stress and headache than short sale.  I wonder if this is true, and how to weigh those options.

I am wondering what other people's experiences have been, if you're willing to talk about them.

For the record, no, I'm not happy about any of these outcomes; I am not someone who reneges on my financial responsibilities and I never imagined I would be in this situation.  My XH left me suddenly with a heavy burden caused by his irresponsibility (as a taxpayer, homeowner, and household financial manager, as well as abandoning his responsibilities as a husband).  The situation I'm in is not one I ever agreed to bear on my own, but it is what it is now.  So I've made peace with this outcome and I'm not looking for disagreement on that point.

So, short sale or foreclosure, if you know the end result will be bankruptcy either way?  How to weigh the pros and cons?

[poppylove]

I *do not* believe that because he files for br, that you do too. But this would be my main concern and I would definitely find someone to help you out in this regards. 

Sorry you are dealing with this mama. 

[mnnice]

Honestly, I am not sure how a short sale would be more stressful than a foreclosure other than your house will be shown.  Which is something people not underwater and difficult financial positions have to deal with if they want to sell too.

Granted I don't know much about either (although we did make an offer to buy a short sale, but we were not the winning bid).

What did people share that made is more stressful other than you need to move sooner?

[zebra15]

I would meet with a couple (not just one) attorney and see what they say.  I filed chapter 7 many years ago (2003??) and even back then attorney's were giving different answers.   

I would look at the 'total debt' picture here.  If its just the house debt of approx 20k that could be split between the 2 of you, 10k is is probably manageable, if there are credit cards, other lines of credit, more debt etc, then I would be looking at Ch 7.

I would also speak with a financial planner and see what they can offer at this point.  If there any $$ to work with, are you in the process of rebuilding your personal finances etc.

[aidenn]

First of all, I agree with zebra15 about speaking with an attorney.  However, I spent a lot of time researching message boards like this so I knew the exact questions that I wanted to ask the atty in my free consult, so I won't deny you the little bit I have learned about my options in Florida.

I am in a very similar situation with only minor changes (I am remarried and my new husband and I are living with our children in the house with me) and we only have the first mortgage.

For us, foreclosure is a better choice.  The big issue with us short sale-ing is that once you have two households, you have to file your Fannie/Freddie paperwork with proof of income and your bank statements every month if the house doesn't sell right away.  For us, this was just too humiliating for something that may or may not occur, if we knew the end result was going to be bankruptcy either way.  Plus, since our mortgage has PMI on it, it would take a minimum of 45 days for an offer to even be okayed by everyone that would need to okay it.  Too exhausting to be waiting with baited breath for that long.

The pros of a short sale is at least you have a chance at getting the residual wiped clean.  You can ask them to write that into the contract, or attempt for settle for less at that time.  My mom had a first and second on hers, and they wiped her 30K+ 2nd mortgage down to 1k.  And if your house sells before the end of 2012, it is my understanding that your tax as long-term capital gains is forgiven through the end of 2012 (again, check with a tax advisor or an attorney).  Also, if you short sale, you are eligible for a HUD mortgage in 2 years (it's 4 for a deed-in-lieu or a foreclosure).

For us, a foreclosure is better because my ex has pretty much drug his feet on submitting all this paperwork monthly (he now lives on the other side of the country) and he's okay with just "forgetting about all this" while I basically suffer through the day to day concerns of legal notices, phone calls, and eviction threats.  Going into foreclosure (I'd really like deed-in-lieu at this point, so we're working on that) would be just less of a stressful hassle, even if I am in the mortgage penalty box for longer.

[worthy]

Thanks for the responses, and I can give an update.

The lawyer strongly recommended foreclosure and bankruptcy.  It's true that I don't have to file bankruptcy if XH does, but in that case the entirety of our joint debt would become mine to repay.  There is more debt than just the mortgage deficiency; there is a very large tax liability that came to light only in the late stages of the divorce process (it was entirely his fault, but legally we are jointly responsible and I can't get out of it even with the innocent spouse thing, unfortunately).  So because the tax burden won't be erased I have to be able to continue paying on that (it is already an unexpected stretch) and I can't afford more on top of that.  There is also a credit debt in his name that I am responsible for paying per the divorce agreement, that would be wiped clean if he files, and that would be a help to me.
 

The short sale would be a lot of work for the realtors and for me, with a lot of fast-turnaround paperwork (with long-distance signatures from XH) and hoops to jump through.  In a case where the end result is that the deficiency might be forgiven, it's worth it, but if you already know the deficiency won't, there is no point on going to all that extra work.  My house may not even sell as a short sale, and the timeframe is rigid with the banks we owe -- you have 90 days from the start of the short sale to bring an acceptable buyer and offer to the bank, within the parameters the bank defines, or you have to leave at the end of the 90 days (if they accept someone's offer they extend it up to 90 days to accommodate the closing).  The realtors are not guaranteed to get a dime from the process and in fact with our house they are likely not to get paid at all, and they are good people and I am not willing to ask them to extend themselves in that way.

Once the foreclosure process begins, the lawyer said I'd be able to stay for about a year (here you have to petition the state or the court or someone to allow you the last 6 months, but it is routinely granted).  Bankruptcy requires that you move out within two months of filing, so I would wait to file that until I knew I had a place to go.  I'm not planning on stopping my mortgage payments until we leave -- I can afford them, and even though some people stop paying strategically so they can bank the money, I think that sounds kind of beyond my ethical comfort.

{sigh}  Not being on such a tight timeframe is a relief.  Not having to get the house ready for showings is a relief.  I intend to leave this house in the best condition possible (I know some people don't do that when they foreclose, but I will).  I'm still fixing it up over the time we have left here.  So, we'll figure out where we're headed next and not take any action until then.

[iowaorganic]

OK- your lawyer might have mentioned this- but if you file Ch 7 the tax liability MUST be at least 3 years old from when you filed the taxes.  Also- check with your lawyer on continuing to pay the mortgage- cause at your hearing the person will want to know why you continued to pay if you are broke and why you didn't pay "these other creditors".  Something I wish my attorney would have explained to me- especially since mine didn't go to the hearing with me.....  

[zebra15]

Originally Posted by iowaorganic 

OK- your lawyer might have mentioned this- but if you file Ch 7 the tax liability MUST be at least 3 years old from when you filed the taxes.  Also- check with your lawyer on continuing to pay the mortgage- cause at your hearing the person will want to know why you continued to pay if you are broke and why you didn't pay "these other creditors".  Something I wish my attorney would have explained to me- especially since mine didn't go to the hearing with me.....  

 This is crucial as the bankruptcy law has changed since I filed.  I'm not an atty but I would probably stop the mtg payments and throw everything I had at the tax bill. (I've seen those suckers and the interest and penalties grow exponentially)   The Ch 7 is going to take all your cash and assets anyway, I would rather pay down my IRS bill at this point.

[iowaorganic]

I wouldn't file unless the tax debt goes too- so check on the time frame for that (3 years from the date of filing the now delinquent taxes).  the IRS is vicious- maybe a little less than the state though :(