Individuals facing financial trouble will often seek numerous remedies before realizing that bankruptcy was specifically designed to help them find a path toward financial stability. Whether it is due to a divorce, medical emergency, job loss or emergency home repair, people can quickly become overwhelmed by debt from countless sources.
For homeowners, the mortgage payment generally represents the single greatest monthly debt they face. Unfortunately, the home can also represent the most the family has to lose. When considering bankruptcy, financially distressed homeowners will often come across the terms “foreclosure” and “short sale” without a clear understanding of the difference.
- What is foreclosure? When a borrower fails to make their mortgage payments, the lender might pursue a process by which they will repossess the home. The mortgage lender must follow specific steps designed to give the borrower plenty of advance notice and opportunities to pay any debt before the foreclosure process officially begins. Essentially, the lender can repossess the home because the mortgage is considered a secured debt. By agreeing to the terms of the mortgage, the borrower has guaranteed repayment by providing collateral. In this case, the collateral is the home itself.
- What is a short sale? When a financially distressed homeowner fears an upcoming foreclosure or other monetary setbacks, he or she might decide to pursue a short sale. The terminology refers to the homeowner selling the property for a value short of the remaining mortgage balance. For example, if there is $100,000 left on the mortgage balance, and the home is sold for $80,000, the borrower is short by $20,000. After the homeowner has explained why the short sale is necessary, they and the lender must come to an agreement prior to the execution of the short sale. When the short sale is executed, the proceeds go directly to the lender who will either forgive the remining balance or will seek a deficiency judgment against the borrower.
In financial dire straits, it is wise to discuss your unique situation with an experienced bankruptcy attorney. A lawyer can develop a plan that is uniquely tailored to your needs and goals. Do not hesitate to seek guidance.