Homeowners who fall behind on their mortgage payments face the possibility of foreclosure — a forced sale of the property that allows the lender to recover part of the debt due. An alternative to foreclosure that may be available is a short sale, in which the homeowner sells the property for less than the amount of the outstanding mortgage loan. If you are in this dilemma, choosing a short sale over a foreclosure may or may not be in your best interests.

A short sale can occur only with the consent of the mortgage lender, who may see the transaction as the best way to cut short its losses. In many states, including New Jersey, if you sell your home for less than the amount due on your home loan, the lender can sue you for the unpaid balance of the loan, obtaining what is known as a deficiency judgment. In a short sale, the lender usually agrees not to sue. The main benefit to you is that the debt is wiped out and no foreclosure goes onto your credit record. This means that you may be able to qualify for a mortgage on another home in just a few years.

However, these disadvantages of a short sale must be considered:

• Although the lender waives its right to a deficiency judgment, you’ll have to pay tax on the savings.
• Failing to pay off your mortgage in full will have a negative effect on your credit score.
• Since the proceeds from the sale won’t be enough to pay the mortgage, you won’t receive any cash from the sale.

Going through a foreclosure won’t necessarily avoid these problems either. For one thing, the foreclosure sale might result in a greater shortfall and therefore a larger deficiency judgment. Furthermore, foreclosure might lower your credit score even more than a short sale and might increase your period of ineligibility for a new mortgage loan. In fact, one of the major advantages of a short sale is the opportunity for your foreclosure defense attorney to negotiate a better deal than a foreclosure would allow.

Another alternative is a Chapter 13 bankruptcy, which stops the foreclosure and may allow you to keep your home. Although a Chapter 13 requires you to continue making current payments on your mortgage, it lets you pay off your mortgage arrears as part of a three- to five-year installment plan.

If you are facing foreclosure on your home, the Law Offices of James C. Zimmerman can give you reliable advice on the best course of action to take in your situation. Call us at 973-764-1633 or contact us online to schedule a free consultation at any of our five offices in northern New Jersey, conveniently located in Vernon, Wayne, Pompton Lakes, Hackensack and Nutley.