How Bankruptcy Affects Short Sale (August 2012)

Many of our clients ask us: How does bankruptcy affect the short sale on my property? The filing of a bankruptcy petition (Ch.7 or 13) results in an automatic stay of collection, foreclosure, and other proceedings by creditors against the debtor under bankruptcy protection.This article will discuss how the bankruptcy automatic stay affects short sale.

When is an automatic stay issued? An automatic stay is filed by a creditor and granted by the Bankruptcy Court, unless the court grants relief from the stay or case is closed or dismissed. The case is usually closed with a discharge order under Chapter 7 or completion of the confirmed plan of payment under Chapter 13.

In regards to a short sale, banks normally stop considering short sale of a property under foreclosure once an automatic stay is in place by the filing of a bankruptcy petition, for fear of violating the stay. However, bankruptcy in short sale is a special case.

Automatic stay should not affect bankruptcy: Because short sale of a property without equity is initiated by the debtor to avoid foreclosure, the automatic stay, which is for the debtor's protection, should not be used against the debtor. For banks, short sale is already a better option than foreclosure (that is why they even do them in the first place).

If banks refuse to proceed with the short sale during the process of the bankruptcy, the debtor who has stopped making monthly payments prolongs his stay in the property until the bankruptcy proceeding is terminated, or relief from automatic stay is obtained from the Bankruptcy court.

So, to block a short sale due to bankruptcy does not make much sense on their part. Banks also know that the summer months and early fall is a hot market for real estate and it is better to allow the short sale and move the property quickly than to deny the short sale and sit on the property longer without collecting payments. The process of short sale should proceed even under bankruptcy and automatic stay.


Written by,
Roman P. Mosqueda, Esq.

Attorney Mosqueda is a practicing Attorney and Real Estate Broker in the Los Angeles area. He has been practicing law in Southern California since 1985. For more information on his office visit his website at: www.MosquedaLaw.com