Los Angeles Bankruptcy Blog

I am always curious when people come to me and say they want to file bankruptcy and do a short sale for the upsidedown mortgage. In my analysis, these are different alternatives to solve the same problem. That is, either a shortsale or a bankruptcy would do the trick (get rid of the real estate property). So, why then, do both?

Let’s do a quick review.

There may be very good reasons to file a Chapter 7 bankruptcy or file Chapter 13 bankruptcy. These would include things like avoiding financial liability for those credit cards you got in over your head with. Or maybe to avoid having to repay the balance on a underwater mortgage or car loan for a house or car you gave back to the bank (or plan on giving back).

There also might be good reasons for doing a short sale (or a quick sale). For example, saving your credit from the hit of a bankruptcy for the home loan that’s under water.

But both? If you have already made the decision of filing bankruptcy, who benefits from your doing a short sale? Your credit? No. The bank? A real estate broker, who may or may not be able to arrange the transaction. But make no mistake: there’s a commission at stake, and in this market, real estate people gotta eat.

Also make no mistake: when you file bankruptcy, there is no transferring or selling of your property. Without taking additional measures, you cannot sell your property while in bankruptcy.

But why would you want to? Let the BK take care of the upside down mortgage when deciding between foreclosure or short sale.

It’s certainly a political issue, especially in an election year. But what do we want our politicians to do about it?