Is Bankruptcy or a Short Sale Better?

If you are past due on your mortgage payments and you are worried about losing your home in a foreclosure action, it is important to consider all of your debt relief options. Filing bankruptcy and short sales are common tools homeowners use to avoid the foreclosure process. Determining which option is better for you will require you to consider several factors, including:


The short sale process requires several parties to participate and there is usually a significant amount of negotiations that must occur. As a result, short sales can be time-consuming and at the end of the process, there is no guarantee that the sale will close successfully. Thus, a short sale is only beneficial if you have sufficient time to complete the sale.

When you file a bankruptcy, you obtain immediate relief from your debt. The automatic stay prevents creditors from taking collection efforts against you while your case is pending. A Chapter 7 typically lasts four to six months, which provides you more time in your home and time to negotiate with your mortgage lender. A Chapter 13 lasts three to five years and you can cure any past due mortgage payments so you are current on your loan when your case is concluded. In either type of filing, you can discharge a large majority (if not all) of your debt.

Deficiency Balance

When you sell your home in a short sale, there is a deficiency balance that is left due on your mortgage loan. This is the amount your lender is left “short” after the home has been sold. Depending on what state you live in, this can create a significant financial issue for you. In many states, there is no guaranty that the mortgage lender will waive the deficiency balance left remaining after a short sale. In a few states, the mortgage lender is required to accept the short sale amount as payment in full. Therefore, it is important to confer with local counsel to before negotiating a short sale.

When you file a personal bankruptcy, any deficiency balance left after the sale of your home is considered unsecured debt. In a Chapter 7 filing, your unsecured debt is discharged in full. In a Chapter 13 filing, you typically pay pennies on the dollar owed on unsecured debt.


Debt cancelled by the lender as part of the short sale can create a tax liability that cannot be discharged in a subsequent bankruptcy. However, mortgage deficiency debt that is discharged in a bankruptcy does not generate taxable income for the borrower. You should consult with a knowledgeable tax professional before agreeing to a short sale so that you are made fully aware of the tax consequences before you rule out a bankruptcy.

Additional debt

If your financial struggles are solely related to your mortgage payment, a short sale will be helpful. However, if you have credit card debt, medical bills and other debts, a Chapter 7 or Chapter 13 filing will permit you to deal with all of your financial issues at once. Bankruptcy is one of the most comprehensive means for handling all of your debt and working with all of your creditors at one time.

If you are past due on your mortgage and/or your lender is threatening foreclosure of your home, it is time to get legal help. Contact a knowledgeable bankruptcy or short sale attorney at Nielsen Law Group today. You can schedule your initial consultation by calling (480) 888-7111 or submitting a web request here.