Common Question: My property is in foreclosure, should I seek a short sale or let the bank take the home in foreclosure?
Answer: It all depends on your situation. Foreclosure can take a long time, especially if you fight it and don’t allow the bank to win by default. So if your income is not currently enough for the rental market, it may be a good idea to stay in the property longer. On the other hand, if you have a job lined up somewhere else, leaving the property in your name longer exposes you to some liability, if the house is sitting empty. Of course, if your income is increasing, it may be advantageous to file a bankruptcy while you still qualify.
Many people believe that achieving a short sale will “save” their credit as long as it happens before the end of a foreclosure. There is no literature that supports this view. If a representative of the bank says something of this sort, have them put it in writing. Once a foreclosure is filed against you, it is a public record, regardless of the disposition. A short sale, a foreclosure, a deed in lieu of foreclosure all represent the same thing: a default by the borrower. In other words, one’s credit is typically ruined before the foreclosure lawsuit by the bank even begins.
In Florida, when people file a bankruptcy, they can either elect NOT to claim homestead exemption on their home and utilize up to $5000 of wild card exemptions on personal property, OR they can claim homestead exemption, protect their interest in their home, and opt for only $1000 of wild card exemptions on personal property. For the lucky few who have equity in their home, the choice is obvious: protect up to $125,000 of home equity and surrender other personal property that exceeds $1000.00 (speak with a bankruptcy attorney for more details on retirement funds, autos, and other types of personal property that may be protected).
These days, however, many people are in homes that have no equity. They owe more than the homes are worth. Many of these people continue to live in their “underwater” or “upside down” homes, and many are still making payments. Others are not making payments, but continue to reside at their home while seeking a modification or going through foreclosure.
When such people file a bankruptcy, should they elect to utilize the homestead exemption to protect non-existent home equity, or should they opt for $5000 in personal property and not exempt their homestead? For a long time, Floridians with no equity could take the $5000 in personal property exemptions, not exempt the home, but not fear that they would lose the home to the trustee in the bankruptcy. Sadly, those days are over.
When a bankruptcy is filed, the trustee becomes the owner of non-exempt assets of the debtor. Recently, the trustees have found that they are able to sell their interest in a property (sometimes referred to as “bare title”) to investors that rent out the home while lengthy foreclosure proceedings linger in the court systems. Eventually these investors lose the home back to the bank that holds a note against the property–but not before they’ve rented it out for a profit for months. That means that people who are planning to stay in their homes, even if there is no equity, need to claim homestead exemption and protect their right to live in the property–otherwise they may be evicted and their home rented for the benefit of an investor. That means that bankruptcy filers claiming the homestead exemption will only be given up to $1000.00 of wild card exemption to exempt other personal property, with an additional $1000 that may be used to exempt an auto. Retirement accounts are 100% protected.
Be sure to speak with a bankruptcy attorney prior to filing your case, so that you know what assets may be at risk if you file.