A short sale is an arrangement between the current owner of a home and the bank that lent them the money to buy their home to accept an offer for less than the total amount owed to pay off the home. A "deficiency" is the difference between the amount owed to the bank and what the bank collects at the short sale.

Different banks have different policies, but you basically just have to demonstrate that your house can’t be sold for what you owe. The best case scenario is to get a bank to actually "write off" the deficiency in conjunction with the short sale. All that happens here is that the seller has some minor derogatory credit reporting, but does not owe the bank any more money. This is typically reported as "creditor settled for less than the amount due."

Additionally, the Mortgage Debt Relief Act of 2007 allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure or short sale, qualifies for the relief. This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately).

Despite popular belief, a short sale, loan modification and even bankruptcy do not hurt your credit as much as the late payments that often lead up to them.

At The Law Offices of W. Trent Steele we specialize in helping distressed homeowners with relief from lenders and creditors. For more information, please call Debbie Haas at 772-408-6969 ext. 2.