Short Sales and Bankruptcy

8 Flares 8 Flares ×

When taking a short sale listing, one of the questions that the listing agent should ask is whether the seller is in an active bankruptcy. Due to the state of our economy, it has become increasingly more common for homeowners to file bankruptcy.

An active bankruptcy can impact a short sale lender’s ability to process a short sale. For this very reason, it is important to have good communication with the short sale seller (the borrower) and obtain as much information as possible about the status of the bankruptcy.

Many short sale lenders will review a short sale offer while the loan is in an active bankruptcy. In order for the short sale lender to complete a short sale and issue the approval letter, bankruptcy documents must be filed and approved by the court. If a borrower is currently involved in a bankruptcy proceeding (or has previously obtained a discharge of this debt under applicable bankruptcy law), all communication and notices are for information purposes only and are not an attempt to collect the debt. The homeowner(s) is/are not obligated to discuss their home loan with the lender or enter into a short sale agreement or other loan-assistance program.

For a short sale to be processed and approved for a loan in bankruptcy, the short sale lender must receive one of the following releases issued by the bankruptcy court:
Granted Motion to Sell; Granted Motion for Relief from Automatic Stay with noted short sale negotiation; Dismissal; Discharge with Abandonment, Closing Order, Final Decree, Trustee No Asset Review.

At Short Sale Expeditor®, we are not attorneys and any borrowers that are uncertain as to whether they should proceed with a short sale, a foreclosure, a deed-in-lieu of foreclosure, or a bankruptcy should seek the advice of the appropriate professional(s) before moving forward.

What is interesting to note is that although a homeowner is not personally liable for discharged debts, a valid lien that has not been reconveyed in the bankruptcy case will remain after the bankruptcy case. Therefore, a secured creditor may enforce the lien to recover the property secured by the lien. What this means is that while the borrower may not owe on the debt, the lien can stay. As such, many short sale sellers who have filed bankruptcy may still liens attached to the property. It is the short sale processor’s or listing agent’s responsibility to work with the lender in order to obtain a lien release and short sale approval in order to close.

Good communication with the short sale seller as well as a careful review of the title report will go a long way towards better short sale processing time and increased success in obtaining a short sale approval.


(photo credit)


  1. Brian Sharp

    Who is responsible to get the relief of stay or motion to sell? I’ve had some lenders tell me the BK attorney must do it, but then the attorney says the lender has to do it?

  2. Camila

    Hi I’m the buyer in a short sale
    Do you have any idea how long it would take for the owner of the short to obtain any of those letters/documents? He went to the court to request it
    They’ve told me they are waiting on a letter to arrive by mail and that it would take 45 days. We are a few days away from the 45 day “deadline”. The lender is ready to approve the short and we are waiting on this letter/document.

    Any advice or ideas?

    • Melissa Zavala

      Sounds like you are in the midst of a waiting game and getting close. Sorry, but each situation is different (depending upon location), so I am not certain about the time frames for your situation.

  3. Pamela Bellah Seattle Realtor

    I represent a buyer in an FHA insured Bank of America bankruptcy short sale – the court approved the sale in December 2012- the listing agent states this short sale has a low liklihood of success (20-25%) because it is a government loan (something to do with an “investor component” and mortgage insurance, and while Wells Fargo now approves short sales of this nature, Bank of America has not yet done so. Any expertise in this area? If not, any direction to recommend?

    • Melissa Zavala

      Unless you are doing the negotiating, there is not much that you can do. B of A does has strict policies with respect to FHA short sales, and you can read more about those policies on their website. I’m not sure whether the bk factor or some other factor unbeknownst to us is what is compromising the listing agent’s success. But, I would definitely have a look at the guidelines on the B of A website.

  4. Liz

    Once the bk is closed does the lender have to wait to receive the closing papers from the court or can they accept a copy of the closing papers your attorney gave you in order to move forward with the short sale? And if so do you know how long that could take ?

  5. Sandra

    We are in BK and we are going FC on our home but we have some who will buy our home thru SS but our attorney told we should not go with SS we should go with FC can you help us out with this ?

Leave a Comment