Bankruptcy?  Short Sale Or Foreclosure?

For the longest time it seemed like if you filed for bankruptcy there didn’t seem to be any reason to do a short sale.  Afterall, your debt is gone and that’s kind of the whole point of the short sale is to get the debt, gone.  In this case it’s not all about the debt.  Bankruptcy affects your credit in a HUGE way, it pretty much eliminates you from buying another home with financing (and credit cards, etc) for at least 3 or 4 years (3 years from discharge).

A foreclosure will prevent you from buying a home with financing for up to 7 years!

You might think to yourself, “well I’ll be sitting out for 7 years due to my bankruptcy, so a foreclosure can’t hurt me.”   If you thought that, you’d be wrong.  You might have noticed some of your neighbors have no jobs and are at home and yet no one has evicted them.  It can be a big win for the bank, they have someone take care of the property and they’ll get to foreclosing when they feel like it.   The result?  Let’s go to an example:

Say you filed bankruptcy in 2006.  The bank took their sweet time foreclosing, so your debt slate is clean but the home still remains an “asset,” since the bank never took back possession.  Let’s say you get clear in 4 years, sometime in 2010.  The bank now decides to foreclose because the see the market starting to come back.  Yep, you guessed it, now you have a bankruptcy that has faded away but a new foreclosure hitting your credit as if it just happened.   So when can you buy again?  Yep, the earliest maybe 2014 with some programs, but if Fannie Mae still exists you won’t get a loan from them until 2017.

After a Bankruptcy?  Short Sale or Foreclosure?

The answer is pretty simple.  You should short sale, there’s almost no downside in this scenario except the time spent.  Not to mention the short sale does the least overall damage to your long term credit.