A "short sale" is a sale of property (usually a residence) in which the proceeds from the sale are insufficient to pay the full amount of mortgages owed against the property. In that case, a lender can choose to accept a lesser amount in exchange for releasing the lien, which is known as a "short payoff."
Our bankruptcy attorneys in Scottsdale note there are several issues to be aware of. First, it is a completely voluntary situation. Lenders often sound like they are going to accept a short sale, demand fair amounts of information, and then literally at the last minute, inform homeowners that they are not going to accept a short payoff. In some cases, that is a drastic consequence because the lender, meanwhile, had initiated a trustee's sale, in which they intend to foreclose on the property and evict the homeowner. In some cases, the lender notifies the homeowner days before that sale that they are not going to accept a short sale. Homeowners who wish to ensure that they have a place to live must make sure that the lender timely agrees to postpone any trustee's sale. If that is not the case, homeowners need to have a "Plan B" in place—either bankruptcy paperwork prepared (the filing of a bankruptcy stops that sale) or an option for a place to which they can move.
Even if the short sale is accepted, there are issues to be aware of. Often lenders will ask the homeowners to sign a document agreeing that even though the lender is releasing the lien on the home, the balance of the debt will remain due and owing. That is a serious problem, and essentially removes the incentive most homeowners have to go through with a short sale at all. In many cases, the lenders withdraw that requirement if pressed, but often they insist on it. In that case, the homeowners must decide if it is worth doing.
There are also potential tax consequences arising from a short sale. If a lender accepts a short payoff, even in full satisfaction of the debt, it can issue a Form 1099 which results in imputed income for tax purposes. That can be a large amount, and can have significant tax consequences, which cannot be discharged in bankruptcy. However, bankruptcy, if filed in a timely manner, removes all income tax issues, so even if a 1099 is filed, it doesn't result in a tax liability. This is a very tricky area of the law, and requires professional advice from a bankruptcy attorney in Scottsdale. Our bankruptcy law firm also handles tax debt relief cases as well.
Homeowners from the surrounding areas of Scottsdale and Chandler should not "jump into" a short sale transaction which often results in only the realtor (who receives a commission) receiving a benefit from the sale. Realtors' interests are much different from homeowners, and even though the realtor may be concerned about homeowners' interests, they will not be concerned about the consequences addressed above. Therefore, it is very important to consult a tax or bankruptcy attorney in Scottsdale to determine the pros and cons of a short sale. Our attorneys answer the 5 most common questions about bankruptcy.
The Scottsdale and Chandler bankruptcy law firm of Clint W. Smith serves the surrounding areas of Chandler, Tempe, Gilbert, Scottsdale, and Mesa in Arizona. Contact our bankruptcy attorney today.
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