Bankruptcy Attorneys & Short Sales

Sorry I haven’t been posting with the vigor of days of yore.  I’ll try to improve on that.  But in the meantime, I thought this conversation I had with a Florida bankruptcy attorney one late night a few months ago was interesting.  The names have been changed to protect the innocent.  And now for the question: should I do a short sale if I’ve already filed for bankruptcy? 

Me: Hi Mary

I saw your ad in the (redacted) and wanted to know if any of your clients liquidate their property through the bk?

I purchase short sales and am able to get $900 of attorney fees approved on each HUD1 to be paid at settlement. 

I have an office in St Petersburg.  Let me know if we can talk.

Paul

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BK Attorney: I usually don’t advise my clients to do short sales unless the creditor will throw them some money.

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Me:  Hmmm…  The bankruptcy stops the reporting of the tradeline and discharges the debt, but the contractors for Equifax, Experian, and TU pick up the summary judgment and add it to the public records section of the credit report.  A completed short sale can keep the public records section clean of the foreclosure.

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BK Attorney: Their credit is already shot and if we file b4 judgment, no loss.

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Me: Only any negative reporting on the tradeline itself (after the bk case number is issued) is barred by the stay and later the discharge injunction.  The foreclosure is still being reported by Choicepoint to the bureaus in the public records section of the report for all those who experienced a completed foreclosure.  And if a short sale is completed after the judgment but prior to sale, the judgment is vacated and per the FCRA can’t appear on the report.

Anyways, I think I get that you don’t like short sales.  FWIW, you and I would probably get along pretty well.

Paul

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BK Attorney: I like a straightforward person.

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Me: I’m as straightforward as they come.  I turn away more business than I accept, by explaining the HAMP or other options that don’t make Paul any money.

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Bk Attorney: If you can tell me how it helps my client, I would love to talk.

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Me: If the borrower was living in the home and wanted to continue to occupy until the end and didn’t care one iota about the stigma of foreclosure then I’d say we’d pass on that one.  However, I don’t think that characterizes the majority of those debtors who own real estate and seek protection under the bankruptcy code.

As for the benefit – first off, it’s free – regardless of the outcome, it doesn’t cost them anything for me to buy the property as a short sale.  If they have an FHA loan then they can get $1,000 cash on the HUD1 at closing.  The cancellation of indebtedness income is covered by the bankruptcy exclusion to debt forgiveness (if they are smart and file prior to closing).  Fannie Mae requires a five year wait after a foreclosure and only two years for a short sale (although the bankruptcy would also have to be seasoned).  And as I mentioned earlier, the public records section of the report will show any future employer, insurance company, creditor, heck even some hospitals run credit reports prior to admittance.  There are also intangible costs/benefits (i.e. emotional, psychological, self esteem, etc) attached to experiencing an event like foreclosure.  

In sum, considering that bankruptcy is a means for a consumer to obtain a fresh start and gradually enter back into the world to get their life back, it is my belief that a short sale is consistent with this goal.  Of course, I do make money buying/selling short sales, so my opinions may be biased; nevertheless, everything I’ve typed is indisputable.

Mary, let me know when you’ll have 15 minutes to talk this week and I’ll give you a call or if you prefer, stop by to see you.  

Have a good night and thanks for the dialogue.

Paul