If you’re facing financial difficulties and struggling to keep up with your mortgage payments in Georgia, you’re likely weighing your options. Two common paths are filing for bankruptcy or pursuing a short sale. The right choice depends on your financial situation, long-term goals, and whether or not you want to keep your house. Let’s explore these options in detail.
Bankruptcy: A Tool for Financial Reset
Chapter 13 Bankruptcy
If keeping your house is a priority, Chapter 13 bankruptcy could be a viable solution. This type of bankruptcy allows you to reorganize your debt and create a manageable repayment plan. For homeowners, the key benefit is that past-due mortgage payments can often be rolled into the repayment plan, giving you time to catch up while keeping the house.
However, Chapter 13 only works if you have the means to stay current on future mortgage payments. If your financial situation doesn’t allow for this, Chapter 13 may not be the best choice.
Chapter 7 Bankruptcy
On the other hand, Chapter 7 bankruptcy provides a way to discharge unsecured debts, such as credit cards and medical bills. While it doesn’t directly help with a mortgage if you want to keep the house, it can free up resources to focus on your mortgage payments. If you’re unable or unwilling to keep the home, Chapter 7 can help you walk away from the debt tied to it without further financial burden.
Short Sale: A Strategic Exit
A short sale involves selling your home for less than the amount owed on the mortgage, with the lender’s approval. This option can help you avoid the credit damage of a foreclosure and provide a more graceful exit from the property.
Short sales might be a good choice for homeowners whose primary financial problem is an underwater mortgage — where the home’s value is less than what’s owed. However, if you’re also dealing with other significant debts, bankruptcy will address the broader financial issues more effectively.
Key Considerations for Georgia Homeowners
- Why miss out on living rent free?
Some mortgage companies might wait six months to a year before they actually foreclose. Why give up this free rent? By maintaining the house and protecting it from scavengers, you are actually helping the mortgage company out.
- Avoid Moving Out Prematurely
Real estate professionals often warn against leaving your home before the lender takes any action. Vacant homes are harder to sell in a short sale, and abandoning the property could hurt your chances of a successful negotiation. - Credit Implications
While both bankruptcy and short sales impact your credit score, foreclosures tend to have the most severe and lasting effect. A short sale may look more favorable on your credit report compared to a foreclosure, while bankruptcy offers a clear timeline for rebuilding your credit, typically within 2 years. - Additional Debts
If your financial struggles extend beyond the house — such as credit card debt, medical bills, or car loans — bankruptcy will provide a more comprehensive solution than a short sale.
Tax Implications of a Short Sale
Filing bankruptcy is not a taxable event. Conducting a short sale might be.
One important factor to consider when deciding on a short sale is the potential tax implications. When a lender agrees to accept less than the full amount owed on your mortgage, the difference — known as the “deficiency” — is typically forgiven. However, the IRS may treat this forgiven debt as taxable income, which could result in a significant tax liability.
Here are some key points to keep in mind:
- The Mortgage Forgiveness Debt Relief Act
For homeowners in Georgia and across the U.S., the Mortgage Forgiveness Debt Relief Act (originally enacted in 2007) provided some relief by allowing taxpayers to exclude forgiven mortgage debt on their principal residence from taxable income. However, this law has expired and been extended several times, so it’s crucial to check whether it applies in the year you complete the short sale. Consult with a tax professional to determine if you qualify for this exclusion. - Insolvency Exception
If the Mortgage Forgiveness Debt Relief Act doesn’t apply, you might still be able to avoid taxes on forgiven debt by claiming the insolvency exception. This exception applies if your total debts exceed the value of your assets at the time the debt is forgiven. Proving insolvency requires detailed documentation of your financial situation, so work closely with a tax advisor to ensure you meet the requirements. - State Tax Considerations
Consult with a CPA BEFORE your short sale to make sure you will not get hit with unanticipated taxes. - Tax Filing Requirements
If forgiven debt is considered taxable income, your lender will issue a Form 1099-C (Cancellation of Debt). You’ll need to report this on your federal and state tax returns. Failing to account for forgiven debt properly can lead to penalties or audits.
Understanding the potential tax consequences of a short sale is essential before deciding to pursue this option. Consult with a qualified tax professional to explore available exemptions and ensure you’re prepared for any financial impact.
Conclusion: Explore All Your Options
Deciding whether to file for bankruptcy or pursue a short sale is a major decision with long-term implications. Consult with experienced professionals who can guide you through the process and help you understand the pros and cons of each option.
Remember, there’s no one-size-fits-all solution. Take the time to assess your financial situation, explore your options, and choose the path that aligns with your goals and needs.