If you realize you can no longer afford your home in New Jersey, you may find yourself wondering if a short sale can help. With it, you can sell your home, move into an affordable place and say goodbye to your mortgage payments. It may seem like the perfect solution for you to avoid foreclosure, especially if you owe more on the home than it is worth.
There is a downside to short sales that could create financial challenges for you in the following tax year. Before you sign any papers to start the process, consider the following information.
You can walk away from it all
Once your lender agrees to a short sale of the property, you will need to find a buyer. Keep in mind that not all mortgage banks and lenders allow short sales because they only get back a portion of their properties’ values. The difference between the sale amount and actual price of the property becomes a discharged debt in your name. Your lender must approve of the buyer before they allow the sale to proceed. The clear benefit is that a short sale makes it so you do not have a foreclosure on your record. The downside is you have an obligation that the IRS classifies as taxable income.
You need to consider the aftermath
If you were struggling to pay your mortgage along with other financial responsibilities, then a short sale might not be an ideal solution for your needs. A more favorable alternative might be bankruptcy. Debts that are dismissed in Chapter 7 bankruptcy are not taxable. However, you must pass a means test to become eligible. If you do not meet Chapter 7 requirements, Chapter 13 might be more beneficial for your situation.
Chapter 13 allows you to restructure your debts, catch up on payments and keep your home. Because there are many things you should take into consideration and know about bankruptcy, you might find it beneficial to speak with an attorney for guidance.