Short sales provide a potential way to prevent yourself from going into foreclosure if you cannot currently pay your mortgage. A short sale lets you sell your home for less than the outstanding balance of your mortgage.
On the plus side, it releases the lien from your home. However, your lender might not forgive the difference lost between the sale and the remainder of the balance. You may also have to deal with tax issues later down the line that can do you more harm than good.
Deficiency judgments
Investopedia discusses the use of deficiency judgments in making up the price difference between a short sale and loan debt. Lenders use deficiency judgments to college the difference owed, but it is not an automatic process. They must make a motion to file a deficiency judgment against you. You can file a motion to overturn this judgment.
In some cases, your contract might have included a deficiency waiver. This automatically prevents lenders from pursuing any remaining unpaid debt on your end.
Forgiven debt as taxable income
Next, you have the potential tax consequences. Assuming that your lender forgives the difference in the loan, you will still receive a 1099-C tax form after the short sale of your house. The form both acknowledges the cancellation of your death and also states that the cancelled debt is part of your taxable income.
This might receive discharge, but only if you are in the process of filing for bankruptcy or if you were in the process during the sale of your home.
You can of course discuss the matter with legal aid, too. This way, you know your options in detail and how to proceed in the best way possible.
