A short sale occurs when one sells his or her home, either on the open market or to a bank or other agency, for less than the balance of the mortgage left on the house. For example, let’s say a man cannot afford his mortgage, but the value of his home has gone down since he financed it. Now, he has $120,000 in mortgage debt but the fair market value of his home is $100,000. Because his home is worth less than what he owes, his residence is “underwater.” This borrower has a few options including letting the bank foreclose the home or participating in a short sale. Let’s say he chooses a short sale and sells the home for $100,000. Then, he will still owe $20,000 to his lender. By definition, the lender forgives the borrower of this differential in a short sale. Now, that man can move on with his life. But, not so fast anymore!

On December 31, 2013 an important law called the Mortgage Forgiveness Debt Relief Act (MFDRA) expired. An April 24, 2014 New York Times article explained the importance of this act and the effect of its expiration. Returning to our scenario above, the man will have to list the amount of money he was forgiven ($20,000) from his lender in mortgage relief on his tax return as income. The MFDRA ensured that this income was tax-exempt. Now that the act has expired, there have been fewer and fewer short sales. In October 2012, 9% of all real estate sales were short sales. In December 2013, that figure dropped to 5.2%. After the expiration of the MFDRA, in January 2014, 4.6% of real estate sales were short sales and in February that figure was only 2.2%. It is likely that the expiration of the law discouraged some from conducting a short sale. It is still possible though that the law will be extended retroactively. Its extension is now up to federal lawmakers.

If you are in a difficult financial situation and do not see a secure financial future ahead of you, then you may wish to consider bankruptcy. Jayson Lutzky is an attorney with an office in the Bronx, New York. He offers free in person legal consultations. With 31 years of experience practicing law, Mr. Lutzky is well-equipped to represent you in personal bankruptcy. Call 718-514-6619 to set up an appointment with the lawyer or visit www.MyNewYorkCityLawyer.com to learn more about Mr. Lutzky’s office.