Short Sale v. Foreclosure in Colorado

February 21, 2011

By: David M. Serafin

Due to the weakened economy in Colorado and across the U.S., many of my bankruptcy clients in the Denver area and throughout Colorado, owe more for their home than the home is worth (i.e. are upside down or have negative equity) and may be inclined to walk away from the home and its onerous monthly mortgage payment, and file for bankruptcy in Colorado Bankruptcy Court.

Many realtors and companies which specialize in short sales (both of which are paid by the mortgage lender if successfully closed) are eager to extol the benefit of a short sale over a foreclosure, particularly as to the impact on your credit score. (Not coincidentally, absent a short sale, these proponents are not paid when a bank or mortgage lender forecloses.)

My bankruptcy clients are surprised to learn that both short sales and foreclosures are marked as an “F” on your credit report (or reduce your credit score similarly even if not expressly deemed to be a foreclosure). Also, with very few exceptions, a homeowner surrendering a home through a short sale or foreclosure is not eligible for new mortgage financing until at least 3 later.

With that said, a short sale may indirectly lessen the impact on your long term credit score under the theory that you can start improving your credit score quicker if relieved from an unrealistically high mortgage obligation sooner so that you can focus on paying other debts. Additionally, a short sale may allow you to avoid any stigma of foreclosure, particularly when a big foreclosure sign is placed in your front yard, and may give you more peace of mind as you can have some control over who buys your house. Further, if you don’t mind moving out sooner rather than later and agree to leave the premises clean and undamaged, the lender may pay you cash – of a negotiated amount – in order to take possession faster (this is referred to as “cash for keys”). Perhaps most significantly, bankruptcy may be avoided if a potential mortgage deficiency is reduced or eliminated by the lender, who may have incentive to negotiate the deficiency in order to avoid a costly foreclosure process.

Despite any pre-conceived notions of the stigma of a foreclosure, this option may be preferable to a short sale in many circumstances. For many banks or mortgage lenders, the foreclosure process can take months: the lender will hire outside counsel to file and record a Notice of Election and Demand and schedule a Rule 120 hearing. A foreclosure sale date will be set for 110 to 125 days from the date of the Notice of Election and Demand. Once the property has been purchased (or re-purchased by the mortgage lender) at the foreclosure auction, the holdover former homeowner still may chose to await eviction, which can take an additional month or two. Assuming no mortgage payments are being made in the meantime, this can result in several months of living for free which can outweigh “cash for keys” inducement by a lender. For more information, please contact an Aurora, Colorado short sale attorney.