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Short sale after bankruptcy will not hurt credit

Can a Short Sale After Bankruptcy Hurt My Credit?

Challenges with the economy, job loss, lay offs and a slow recovery has forced many homeowners to file for bankruptcy protection to help stop the financial bleeding of a reduced income household.

Bankruptcy can be a difficult and emotionally taxing experience.  When a family’s income is reduced, the credit card debt can slowly stack up until it gets to a point where you can’t keep up with all of your credit card payments and your mortgage payments.

Using Bankruptcy to Preserve Homeownership

It doesn’t happen over night, but the debs slowly build up until one day you realize that minimum credit card payments on top of mortgage payment are simply too much to keep up with and something’s gotta give.

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Faced with being stuck between a financial rock and a hard place, it is not uncommon to choose to eliminate the debt through the bankruptcy and continue to make the mortgage payments and preserve the family home.

Eliminating the demand of maxed out credit cards can buy you time and money to pay toward the mortgage, but if financial challenges continue you may be faced with making even harder choices about your home.

Reaffirmation of Mortgage Debt

A reaffirmation agreement excludes the debt from bankruptcy protection

As a homeowner, one of the toughest decisions facing hardship victims is how to preserve your home.  Simply including your mortgage in the bankruptcy doesn’t mean that you are free and clear, the mortgage payments still need to be made if you wish to continue to live in the home.

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Reaffirming the mortgage means that it is excluded from bankruptcy protection.  Reaffirmation means that if you default on the mortgage, or have to short sale the home in the future

In many cases, entering into bankruptcy can help open negotiations with your lender to discuss loan modification or other payment relief options.  But lenders haven’t always played nice, many times will not respond to modification requests, and simply ignore reaffirmation requests and include the mortgage in the bankruptcy.

Credit Consequences of Short Sale after Bankruptcy

When default seems inevitable, homeowners have to make tough choices.  Defaulting on a mortgage after it has been included in bankruptcy will not hurt your credit score.

Defaulting on a mortgage after it has been included in bankruptcy will not hurt your credit score

However, when it comes to buying another home in the future, choosing foreclosure or short sale can carry different recovery periods and cause significant differences in the amount of time you will have to wait before being able to boomerang back into a home.

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Timelines to buy after a bankruptcy or short sale run concurrently, meaning that if you filed for bankruptcy, and did a short sale at the same time, the waiting periods would begin simultaneously and the most restrictive (longest waiting period) would determine the date that you could buy again.

If you have questions about short sale or foreclosure after a bankruptcy, you can ask a question in the comments section below.

About Your Expert

Scott Schang

As a 19 year veteran of the Mortgage and Real Estate industry, I am passionate about educating and empowering consumers. I have been writing about consumer protection issues, and making sense of complicated real estate and mortgage topics on this website since 2007

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  • Fred Gamble Jr says:

    I got divorced in 08/2014, discharged BK in 07/2015, short sold my home (included in BK) in 06/2016. My credit score is 640 and advancing due to the work of credit repair which I have employed since my BK. I want to purchase a home and wonder if that would be possible now. As mentioned, the BK included my home, however, it was short sold last year.

    • Hi Fred,

      Using a FHA loan, there is a 3 year waiting period from the short sale before you would be eligible for financing. Using a conventional, you can ignore the short sale date as long as it’s been 4 years since the bankruptcy was discharged.

      Hope this helps?

  • LLamaTiper69 says:

    My ex-wife and I had two homes we when we filed for divorce.  We each kept one house after the divorce, and transferred the deed, for each house, to each other.  In 2010 my ex-wife filed Chapter 7 bankruptcy, and I followed in 2011.  Neither of us reaffirmed the the original loans.  My ex-wife wants to short sale her house.  Should I be concerned with any tax obligations from the short sale?  The bank is asking me to sign some paper work, but I am hesitant in doing so.

  • Dougjen I am a lender in California, and I have a lot of experience with this scenario.  Essentially, you would be eligible for Conventional financing four years from the discharge of the bankruptcy, as long as your name is removed from title (short sale, foreclosure, deed in lieu) on the current home.
    I would suggest that you speak to a lender that can determine if you have the ability to qualify for a new home now, so that you can begin the process of having your name removed from title to the home.
    I have several lender friends across the Country that understand these guidelines and can help.  If you shoot me an email to scott@findmywayhome.com, along with the State you’re buying in, and I can introduce you to someone that may be able to help.

  • Dougjen says:

    It does help. Bk was in 2010. Now if we would like to buy another home for credit rebuilding how difficult would this be or do you have recommendations on how to move forward

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