Since we are not attorneys nor a CPAs, we can not give legal or tax advice, and the following should not be construed as such.  Please understand that there may be serious tax and legal consequences to the Seller in a short sale transaction.  We strongly urge you to see other professional advice.

Sellers often ask which is better... a Short Sale or a Foreclosure.  Well, that depends, and it will always depend.  More often than not, a short sale is going to be 'better' because the consequences will be less severe.

For example, there is a negative stigma associated with a foreclosure.  From the sheriff knocking on your door to all of your belongings beside the street curb, no one wants to go through the humiliating foreclosure process.  A short sale will allow you to sell your home with a sense of dignity, all the while you are still living in your home.  No curbside service with a short sale.

Both foreclosures and short sales will have credit consequences and both may stay on your credit report for 7 years.  However, whereas a foreclosure may prevent a lender from approving you for another home loan for 5 to 7 years afterwards, typically, short sellers may be able to purchase again within 2 years.  Alot depends upon how a short sale is reported to the credit bureaus.  If it is reported like the vast majority of cases as "settled for less than full value", then your credit will indeed take a hit, albeit still smaller than with a foreclosure.  Alternatively, we strive to communicate with lenders to report the sale as 'paid in full' which not not always likely, but sstill attainable, and a much better consequence on your credit report.

Many people think that if a home is foreclosed upon, the seller can just walk away, free and clear of any debt.  Not so fast!  While in some states, that may be true, in North Carolina, laws may allow a lender to pursue a 'deficiency judgement' against the seller for any amount of debt that was not paid.  In the case of a foreclosure, the amount of debt not paid will be quite larger than the amount of debt not paid in a short sale.  Being responsible for part of a debt is much better than being reponsible for most of the debt.

In many instances where your short sale has been properly negotiated, the lender may also release you from the entire debt.  Instead of just releasing the lien on the property, they may consider the debt 'Satisfied in full'!  This means that they will take no recourse against any debt unpaid after the close of the sale.  Of course, this will vary from lender to lender and from seller to seller.  But in cases where the seller is insolvent, it is more likely to happen - but is never guaranteed!

And then, there are the tax consequences.  Whether a foreclosure or a short sale, it may be likely that the Mortgage Forgiveness Debt Relief Act of 2007 will forgive any unpaid debt.  However, this all depends upon whether or not your property is a primary residence (likely) or an investment property (unlikely).  But, if you refinanced your home and took a large amount of cash to buy new furniture, it may be unlikely that the unpaid debt is forgiven.  If this legislation does not apply to your situation, you may be 1099'd by the lender for the unpaid amount.  Please seek professional tax advice to determine the consequences in your situation.

There are certain pros and cons to each situation. In most cases, a short sale, regardless of the consequences, is still a better route than simply letting your home go into foreclosure.  But do keep in mind, even if you give the keys back to your lender, there is a strong liklihood that the lender can still pursue a course of action against you, the seller, for any loss they may have incurred.  If you are going to do something, and if a short sale is a viable alternative, a short sale is almost always the best option.

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