It is very common for bankruptcy filers to ask their attorney about the advantages or disadvantages of proceeding with a short sale of their real property, either before or after filing for bankruptcy. This didn't use to be a common question due to the fact that these sales weren't common when the real estate market was strong. A "short sale" means you are asking the lender to approve of the sale of the real property for less than the full amount of the loan. For example, in today's economy, particularly in states where the bubble's burst was felt most profoundly, it is very typical for a homeowner to owe more on their house than the house is worth. This is often referred to as being "upside down." So if a homeowner wishes to sell his house for the going rate of $250,000 despite still owing $400,00 on one or more mortgages, the sale would be considered a short sale. Bankruptcy filers, perhaps from the encouragement of their real estate agents, want to know if performing a short sale would be in their best interest.
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In most cases, it simply isn't worth proceeding with a short sale if you have filed or will be filing for bankruptcy. First, a short sale can trigger a taxable event based upon the fact that forgiven debt may be considered as income. Second, a short sale has almost the same negative effect on your credit as a foreclosure, and perhaps even worse than a bankruptcy on your credit. Third, it is likely a waste of time and money. Normally, the only party benefiting from a short sale is the realtor. Fourth, and finally, you may be able to stay in your home longer by waiting for the foreclosure process to take its course. Many lenders would rather a house stay occupied by a non-paying owner awaiting foreclosure than for the house to lay vacant for an extended period of time.
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