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If your debt load is outpacing your income, you might be juggling your bills, overcharging your credit cards, and figuring out which bills get paid each month and which ones get skipped. Your home mortgage might be your biggest bill, but it is not one you should take lightly. After as few as four missed payments, you could be in default, and your lender could proceed to foreclose on the home, kicking you out of the house and selling it out from under you no matter how far along you are toward paying it off. And if the amount they get in the sale does not cover what you owe, you could still be liable for the deficiency.

What do you do in such a situation? A short sale is one option, and bankruptcy is another. If you are in Orange County, Los Angeles or elsewhere in Southern California, The Law Office of Charles A. May can help you weigh those options. Call today for a free consultation with our lawyer.

What Is a Short Sale?

A short sale occurs when you sell your property for less than the remaining balance on your mortgage. This is done after consultation with your lender who agrees to accept the proceeds from the sale in full satisfaction of the debt. The key to a successful short sale is getting the lender’s agreement that you won’t be liable for the deficiency, which is the difference between the sale proceeds and what you owe on the mortgage.

A short sale can be a good alternative to foreclosure, but it has its pros and cons.

Advantages of a Short Sale:

  • Less Impact on Credit Score: Although your credit still takes a hit, a short sale should have a lesser impact on your credit score than a foreclosure, which can make it easier to secure a new home loan sooner or other credit in the future at a favorable rate.
  • Control Over Sale: You have more control over the selling process, including who buys your property.
  • Possibility of Deficiency Forgiveness: Some lenders may agree to forgive the remaining balance after the sale. Although you might be able to afford to pay a deficiency judgment if it is only a fraction of what you owe, negotiating deficiency forgiveness is key to a successful short sale.

Drawbacks of a Short Sale:

  • Time-consuming: The process can take several months to complete.
  • Uncertainty: There is no guarantee that your lender will agree to a short sale or forgive the remaining debt.
  • Deficiency Judgment: If you cannot negotiate away the deficiency, you might still be stuck with a large bill you cannot afford to pay.
  • You Lose Your Home: This does not matter as an alternative to foreclosure, where you also lose your home, but it contrasts with bankruptcy, which can prevent foreclosure and keep you in your home.

How Can Bankruptcy Avoid Foreclosure?

Once you file for bankruptcy, an “automatic stay” prevents creditors from taking collection actions against you, including foreclosure. Whether you are behind in payments, have received a notice of default, or foreclosure proceedings are underway, the automatic stay prevents a foreclosure from being started or halts it from going forward while you are in bankruptcy.

While the automatic stay is in place, you can move forward dealing with the mortgage permanently through bankruptcy. Chapter 7 allows you to wipe out unsecured debts like credit card bills and medical expenses, giving you a fresh financial start. By eliminating unsecured debts, you can focus on keeping up with secured debts like your mortgage.

In Chapter 13, not only can you adjust and eventually eliminate unsecured debts, but you can deal head-on with a pending foreclosure. Chapter 13 takes your missed mortgage payments and rolls them into your repayment plan, curing the default and ending the foreclosure. Also while in bankruptcy, Chapter 13 may allow you to strip away second or third mortgages, and “cram down” or bifurcate a first mortgage for a more realistic loan-to-value ratio. These measures make your mortgage affordable going forward so you can stay in your home.

Short Sale vs Bankruptcy in Southern California

When considering a short sale or bankruptcy, think about your long-term financial goals, the assets you wish to keep, and the debts you need to resolve. It is crucial to consult with experienced professionals, like our team at The Law Office of Charles A. May, to help you evaluate which path is best suited for your unique circumstances.

The Law Office of Charles A. May is committed to offering personalized, compassionate legal guidance to help you make an informed choice. Whether it is through a short sale or bankruptcy, we aim to help you regain your financial footing and look ahead to a more stable future. For help with mortgage issues and bankruptcy in Orange County, Los Angeles and Southern California, call The Law Office of Charles A. May for a free consultation.

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