Short Sale: A Way Out From Under a Crippling Mortgage in NJ or PA
Since the pandemic, families have been struggling to pay bills, find work and are losing homes to foreclosure. While government officials search for ways to move the country down the road to recovery, many families are left searching for ways to make ends meet.
According to a post-pandemic study by RealtyTrac in April of 2022, it shows that “New Jersey, Illinois and Ohio lead the nation in the level of foreclosure since the end of the COVID-19 pandemic. In New Jersey, the high foreclosure spike was fueled by Governor Phil Murphy’s extended lockdown during the pandemic.
By executive order, Murphy shut down New Jersey businesses state-wide for months, then slowly reopened them with limited capacities and arbitrary public health guidelines while many other states across the nation reopened to avoid long-term personal financial disasters.
Those shutdown forced hundreds of thousands of New Jerseyans to tap into retirement accounts early or worse, go into default and delinquency on home mortgage payments, energy bills and utility bills. The extended Murphy lockdown compounded problems for thousands of New Jerseyans who are now losing their homes after the federal foreclosure moratorium ended.
New Jersey’s foreclosure rate more than two times higher than the rest of the country.” Read full study here.
You Have Options
For families who have experienced job loss, one of the biggest worries may be making the monthly mortgage payment. In situations such as this, the best possible scenario would be to sell the home to get out from under the burdensome mortgage payments and into more affordable housing.
When a mortgage is underwater, the homeowner may feel as though the only options are to continue to scrape together the monthly mortgage payment or stop paying on the mortgage and let the home go into foreclosure. Selling the house may still be an option for the homeowner though; selling the home through a process known as a short sale.
What is a Short Sale?
A short sale is a process of selling a home for less than what is owed on the mortgage. To complete a short sale, a homeowner needs to have the approval of the mortgage holder and the assurance that the mortgage holder will accept less than what is owed for the mortgage.
A short sale will not result in a profit for the homeowner; however, the homeowner is able to walk away from the house and the mortgage without being foreclosed upon, which tends to be a much longer process.
A Few Considerations
Short sales are negotiated agreements with mortgage holders; thus, in certain situations mortgage holders may be reluctant to agree to accept less than what is owed to them. Typically, mortgage holders will only agree to short sales when homeowners default. If homeowners are making mortgage payments on time, what is to say that they won’t continue to do so?
Also, if there is a second or third mortgage on the home, the holders of those additional mortgages also will need to agree to the short sale.
During negotiations with mortgage holders, homeowners will want to negotiate a provision in the agreement that states that mortgage holders will accept the short sale amount as payment in full for the mortgage – forgiving any debt that remains after the short sale. This is important because some states allow lenders to pursue deficiency judgments against homeowners for the amount still owed on the mortgage after the short sale – mortgage balance minus short sale amount equals deficiency. So, even after the completion of the short sale, a mortgage holder may still seek the remaining amount due on the mortgage from the (former) homeowner.
While mortgage holders may be willing to forgive any debt remaining after short sales, the government may seek to get its share of the forgiven debt.
In a typical debt situation, money is loaned with the expectation that the full amount plus interest will be repaid to the lender; therefore, loans are not taxed as income. However, when lenders forgive debts, the amount forgiven is not repaid and provides a benefit to borrowers. The amount forgiven – the benefit to the borrower – will be taxed as income for the borrower by the Internal Revenue Service (IRS). Lenders report the amount forgiven to the IRS on a Form 1099-C, Cancellation of Debt.
Amid the 2007 housing crisis, the federal government realized considering debt forgiven after short sales as income would make an already precarious situation worse. Therefore, the Mortgage Forgiveness Debt Relief Act of 2007 was passed. It has since been updated in September 2019.
The act allows for forgiven debts, up to $2 million, on short sales to be excluded from borrowers’ income tax. To qualify under the act, the forgiven debt had to be used to purchase or remodel the borrower’s principal residence, and the residence had to be used as security for the loan. Learn More about the September 2019 updated Mortgage Forgiveness Debt Relief Act here.
Discuss Your Situation With An Experienced Local Attorney in Cherry Hill, NJ
For homeowners who are struggling to meet their financial obligations, speaking to an experienced bankruptcy attorney will help you fully understand your situation and all of your options, including a short sale, for addressing your situation. All situations are unique and very personal; therefore, what works for one homeowner may not work for another.
Attorney Joel R. Spivack has been serving clients throughout New Jersey for over 30 years specifically with bankruptcy and real estate transactions. Contact us today for your free consultation.
We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.