New Jersey homeowners facing financial difficulties may consider several options to avoid foreclosure. Short sales often come up in discussions of what to do if you are having trouble making your mortgage payments. However, a short sale may come with certain consequences that you might be able to avoid by turning to bankruptcy instead.

When deciding how to handle debt and mortgage arrears, it is important to understand the pros and cons of each option in your particular situation. A qualified attorney can help you make the decisions that will work best for you.

Understanding a short sale

In a nutshell, a short sale can happen when you get your mortgage lender to agree to let you sell your home for a price that will not cover your current mortgage. The lender then forgives the balance of the mortgage. Homeowners who find themselves unable to make payments but whose home’s market value has decreased may see the short sale as an attractive option.

Potential complications

However, the short sale does not always offer the clean slate homeowners need. Many people do not know that they will have to pay tax on the amount the bank forgives, as the IRS considers this as income. You may also face demands from your personal mortgage insurance (PMI) carrier, which may place conditions before it allows a short sale to proceed.

Advantages of bankruptcy

Filing for bankruptcy can present a better option for avoiding foreclosure. Under a chapter 7 bankruptcy, your primary residence will often be exempt from the liquidation sale. A chapter 13, which is based on structuring a repayment plan, allows you to keep your home and may help you restructure your mortgage payments as well.

Concerning credit scores

One of the top reasons homeowners may feel wary about bankruptcy is the effect on their credit scores. However, a short sale typically affects credit scores only slightly less than bankruptcy. In general, the best way to deal with a potential credit score dip is to choose the most effective method of clearing your financial slate and make sound decisions going forward.