Short Sale, Foreclosure or Bankruptcy?
Losing your parents can be extremely difficult no matter how old you are, but when you lose a parent when you are grown, many find themselves with additional responsibilities. In some instances, they will find themselves responsible for caring for their remaining parent who is now grieving. Some discover that their remaining parent is left in an unfavorable financial situation as well. This can leave the child worrying over how to help their parent rally after losing their spouse. The first step is often to handle real estate, particularly when there are multiple homes with high mortgages and the spouse remaining behind cannot afford to make the payments.
If you are in this situation, you’ve probably run across two solutions that seem to make sense: short sale and bankruptcy.
For many in this type of situation, the short sale is a good idea. This will enable them to get rid of the financial obligation of the “second home” without endangering their primary home (even if it has equity) or any of their other assets.
Walking away from the home and allowing it to go into foreclosure could be particularly negative as, depending upon state law in the state where you reside, the spouse who is left with their name on the property could be held liable for any of the unpaid balance on the mortgage after the foreclosed house is sold at auction. For example, if the mortgage balance for the house was $200,000 and the house was foreclosed and sold at auction for $150,000, the lender could come back to the “owner” of the house and hold them liable for the difference of $50,000.
The other option is bankruptcy. It could provide bankruptcy protection and a discharge of debts. Since the main question is regarding a “second home,” it’s possible that there could be a substantial amount of equity in the primary residence. Before filing for bankruptcy, make sure to discuss the specifics regarding assets and debts that would be considered by the bankruptcy trustee with an experienced attorney.
In situations when the “parent” is experiencing health problems or diminished mental capacity, you may need to first consider obtaining POA (Power of Attorney) so that you can handle the process on their behalf. To address this issue, contact a local estate planning attorney.