Expert: Los Angeles Bankruptcy Lawyer Leon D. Bayer - 1/4/2012

Question
QUESTION: I filed Chapter 7 in 2010; it was discharged April/2011. I kept my primary residence and let go of the investment property. Since I am liable for the HOA on the investment property, my attorney suggested I lease it out until the bank takes my name off the title. I (FINALLY) received a letter from the bank asking me which I would opt for; a short sale or foreclosure. Since the debt has already been discharged, is there any advantage of going through an arduous process as a short sale?

My understanding is that after a bankruptcy, a lender cannot report "foreclosure" but simply "0 balance, discharged through bankruptcy." If this is correct, this should not have any bearing on my credit score. Is this true? I did contact my attorney, but he has been unavailable, lol.  

So, simply put, in CA, after a discharged bankruptcy, short sales or foreclosure?

Thank you for your time!

ANSWER: I tend to shy away from the idea of a "short sale" after a Bk is discharged. The reason is because your credit is probably trashed anyway, and the sales transaction is still a voluntary sale on your part that may create a potential for future liability against you.

As a seller in California you are required to give certain disclosures to the buyer. Hence, the transaction creates a possibility of future "risk" to you, but without any offsetting compensation to you for taking the risk because the transaction pays no cash to you. I will explain this in more detail.

As an example of the risk, suppose the buyer later on finds something wrong with the property that you failed to disclose,  (it might even be something you really didn't know about, but a vindictive buyer says you did know). Either way, you might get sued, and the buyer will allege that you knew about the problem and that you deceitfully failed to disclose it.

Your BK can't protect you from such a suit, because the sales transaction occurred AFTER you filed your BK. This is why I say that when you do a short sale you are taking on potential liability without any compensation for the risk.

Most people who suffer a foreclosure or short sale have not had enough money to adequately maintain their property over a lengthy time period, and there are often lots of defects, such as water leaks, mold, electrical problems, broken appliances, defective tile, drainage problems, foundation settling, broken air or heat, etc. Even in a condominium, there could be unfunded liabilities owed by the HOA, problem neighbors, or issues already known about that will require a future special assessment. The end result is that there may be expensive issues that will confront the buyer.

Human nature being what it is, people have a natural tendency to try and find someone else to pay for their problems. Many times an unhappy buyer will sue a seller because you are the party that sold them the property, and they think you sold them a lemon. Even if the risk is minimal, why do you want any risk at all, especially when you get no money out of the sale?

Is there an upside to doing a short sale in your situation? I can't think of any, other than speculation that maybe it can make your credit look a little better?

My advice might be different for someone else, if no bankruptcy had been involved.

Lastly, I recommend you get the advice from a good CPA just to make sure there are no unexpected tax issues.

If you or other readers want to keep up with my blog postings about life in and out of bankruptcy, you can follow my blog at http://www.bankruptcyblogger.org/ my personal web site at http://www.debt-relief-bankruptcy.com and A Human Guide to Bankruptcy at http://www.thebankruptcyguide.net/

---------- FOLLOW-UP ----------

QUESTION: Thank you for your response, Mr. Bayer!

One specific question is how a lender reports a foreclosure
after a bankruptcy discharge. I was told that they cannot
report "foreclosure" but only "0 balance, bankruptcy discharge."

Do you happen to know if this is true?

Thank you again for your time!

Answer
The basic rule is that a lender may report anything that is true.

I checked with a very knowledgeable mortgage broker just a few minutes ago so I could give you a better answer.

He tells me that he has seen actual credit reports which state "foreclosure" right alongside the term "discharged in bankruptcy."

He was looking at just such a report, coincidentally as we spoke, trying to get a loan for a client of his! He also says that if there was a short sale, the credit reports are stating words to the effect, "settled for less than amount due."

I suggest you check with a few different mortgage brokers in your own community and ask what they have been seeing on reports for people who have had short sales and foreclosures, and whether they have seen that it makes any ultimate difference in getting new credit.