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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.

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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.

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.

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About Your Expert

Scott Schang

A 20 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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  • Cris says:

    I filed bankruptcy over 7 years ago. I have 20% to put down on a second home. Does it matter if my 1st home has a mortgage? I technically don’t owe anything. Does public record show the amount owed on the home?

    • Scott Schang says:

      Hi Cris, great question. Bankruptcy does not mean that you “technically don’t owe anything”, it only means that in the event that you do default on the mortgage, the creditor is not allowed to attempt to collect the debt. For credit cards and other installment debt, yes, you “technically” can not pay and it’s not reported on your credit and you don’t have to pay it back. However, if you don’t make payments on a mortgage, the bank can foreclose.

      So, with all that out of the way, assuming you’re still making your payments on your mortgage for your primary residence, Fannie Mae’s guidelines will allow you to buy again 4 years from the discharge of a bankruptcy. You should have no issues if you are working with a loan officer that has experience with these guidelines.

      If you would like an introduction to someone with experience in this area, you can shoot me an email to scott@findmwayhome.com and I can make an introduction to someone that I know and trust. Please include what State you’re trying to buy in.

      Hope this helps?

      • Cris says:

        Thanks for the info. The problem is I’m trying to buy a home, but my 1st home is underwater. J need to sell my 1st home in order to buy the next. Since it will be a short sale, it’s been over 7 years with bankruptcy, is there a program that will allow me to buy a home now?

        • Scott Schang says:

          Ok, I understand now. You could qualify for the financing for the new home, 1) if you can qualify with both payments (new and current), OR 2) if you short sale the current home and then buy the new one. This is definitely outside of the box, and Fannie Mae guidelines do not address this type of scenario. I have done this successfully, but it’s very challenging finding an underwriter that’s ok with it.

          99 out of 100 loan officers will not be able to do this, but I can assure that we’ve done it before.

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