Steps to Take After a Short Sale


There are various adverse implications that arise from a short sale – primarily that the short sale is reported on one’s credit report, where it will remain for seven years.   However, there are certain steps one can take to rebuild their credit and a viable financial future.  First, a sale is “short” because the property is sold for less than what is owed, the difference of which is a known as a deficiency.  The deficiency, over a certain amount, is reported as taxable income.  What does this mean?  The IRS has showed up to the short sale party, though after all party goers have left and the music has been turned off.  Said another way, the IRS will be seeking payment on the taxable liability.  Do not ignore this reality by employing ostrich technique of putting your head in sand when you hear from the IRS.  Work quickly (even though they work slowly), and either pay the taxes owed immediately, or make payment arrangements and be diligent about paying them.  The IRS does not go away and their debt is not dischargeable in a bankruptcy.  If necessary, find and work with a good tax attorney.  The last thing you want is outstanding tax liability that could result in income or bank account garnishment and/or tax liens that become part of the public records, which is information routinely sought out and reported by credit bureaus.

Continue those payments

Also, and perhaps this is a no brainer, continue to timely make payments to all other creditors, as this is one of the biggest factors connected to one’s credit score.  Also consider reducing the amount of debt  you owe, lowering your debt-to-income ratio.  But keep in mind  that use of your credit also plays a role in determining one’s creditworthiness.  On the other hand, if you do not have credit, consider obtaining a credit card, even if at a higher interest rate, and if necessary a secured credit card.  Keep your purchases manageable and repeat the timely payment instructions above.  It is a delicate balancing act, but ultimately you want to demonstrate to creditors – new and old – that you are responsible with the credit you have and are not overextended and burdened with debt you cannot afford.

There is life at the end of a short sale

Within two to three years, lenders will extend credit, including mortgage loans, to  individuals that have gone through the short sale experience.  There is not one solution that will fix all situations, however, keeping the IRS off your back and using the other credit you do have responsibly will go a long way.