What is the advantage of doing a Short Sale after a Bankruptcy?
It’s true that the Bankruptcy (Ch 7) will already hurt a borrower's credit score to a significant degree and that a Discharge in the Bankruptcy will prevent the lender from seeking a deficiency from the borrower (how much is owed more than how much the home sells for in foreclosure), which are the 2 main advantages of a Short Sale (less credit impact and also avoiding a deficiency). Yet, the advantage of a Short Sale after a Bankruptcy is that on a future Uniform Residential Loan Application, Fannie Mae Form 1003 (when seeking a mortgage for a future home), there are 2 "Yes No" questions that state as follows (and require additional details for a Yes answer):
"c. Have you had property foreclosed upon or given title or deed in lieu thereof in the last 7 years?"
"e. Have you directly or indirectly been obligated on any loan which resulted in foreclosure, transfer of title in lieu of foreclosure, or judgment?"
Therefore, a Short Sale can avoid being Red Flagged pursuant to either of these questions and it can avoid the hassle of attempting to get a future loan. Please note that there is also a question about Bankruptcy in the last 7 years (question “b.”), but question “e.” above survives for the lifetime of the applicant. Therefore, Bankruptcy will only be an issue on applications for 7 years, while a foreclosure is an issue forever.