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Bankruptcy and Short Sales

Many of our clients who own real estate and are facing foreclosure issues, especially those contemplating Chapter 7, ask us about short sales.  Specifically, they ask us whether they should sell their property first, and then file for bankruptcy.  The answer is an emphatic NO!  It is almost always better to file the bankruptcy first, and then sell the property at a later date.  Why?  First, there is no need to sell immediately.  You (the client) are not getting anything out of the sale - that's why it is called a short sale!  The only one who will receive anything at all is your real estate agent, and they can wait!  Second, and more importantly, the short sale can make filing bankruptcy dramatically more difficult, and sometimes impossible.  This is because you are allowed to deduct expenses for any secured debts your are liable for, such as mortgages.  If those expenses no longer exist, you may have surplus income that makes a Chapter 7 problematic.  Example: You bring home $5,000, and your monthly living expenses are also $5,000.  Of those expenses, $2,000 is your mortgage.  Now let's say you sell the property in a short sale, and move into an apartment that is $1,500 per month.  See the problem?  Now your expenses are only $4,500 per month - you have $500 extra income each month with which to pay your bills.  Now your only choice may be Chapter 13, which is more complicated and more expensive.  Still glad you did the short sale first?  This issue comes up somewhat often these days, so if you have any questions, feel free to  contactCalabasas bankruptcy attorney and talk with us.

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