What is a short sale? Five things you need to know.

By , Contributor

3. How do short sales compare to bankruptcy?

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    Kencel Louisius, of Lake Worth, Fla., is a homeowner looking for a loan modification at Hope Now, a voluntary private sector alliance of various organizations to help homeowners facing foreclosure at the Palm Beach County Convention Center in West Palm Beach in August. Some homeowners try bankruptcy to try to avoid foreclosure, but the best bet is often a short sale.
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When faced with foreclosure, some individuals turn to bankruptcy instead. In some cases, filing for bankruptcy can be less damaging to your credit profile than having a foreclosure on your record. Filing for bankruptcy will consolidate your debt and can wipe out your liabilities. But it will not prevent an eventual foreclosure if the bank has already started the process. A bankruptcy only delays a foreclosure. The property will eventually foreclose, which will also affect neighboring values by up to 28 percent.

However, if your home is the only debt that is creating your financial hardship, a short sale is probably your best alternative to bankruptcy. That's because a short sale will be reported as a “settled debt” versus having to go the route of bankruptcy or foreclosure, which is far less damaging on one’s credit report. Although you can conduct a short sale while in bankruptcy, it requires strategy and a plan. It is best to consult with a knowledgeable bankruptcy attorney and short sale real estate agent before making any decisions.

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