Short Sales During Bankruptcy in Massachusetts: How the Two Processes Fit Together

Quick Answer
Yes, but a short sale during bankruptcy needs two separate approvals, not one. Your mortgage lender must approve the short payoff, and the bankruptcy court must authorize the sale under 11 U.S.C. § 363. Both run on their own timelines. Budget four to eight months in Massachusetts, and expect the lender to be the slower of the two.

What a Short Sale Actually Is

A short sale is a sale for less than the mortgage balance, where the lender agrees to release its lien and accept less than it is owed. It is a negotiated outcome, not a right. The lender can say no.

In Greater Boston, short sales became rare during the long appreciation run — most homeowners have equity. They resurface in specific situations: a recent purchase at the top of a market, a heavily encumbered property with multiple liens, deferred maintenance that has outrun the value, or a condo in a building with assessment problems.

The Two Approval Problem

This is what makes short sales in bankruptcy different from short sales generally, and it is where most transactions go wrong.

The two can overlap — but only if someone is deliberately running them in parallel.

Left to sequence themselves, they run end to end and you lose months. That is usually enough time for a buyer to walk.

VIP Group's take: We start the lender package the same week we list, and we tell the bankruptcy attorney to be ready to file the motion the day we have an accepted offer. Nobody waits for anybody.

What Happens to the Deficiency and Why It Is the Whole Point

If your home sells for $480,000 and you owe $530,000, there is a $50,000 shortfall. That is the deficiency, and what happens to it is the single most important question in the transaction.

Outside bankruptcy, the lender may pursue you for it unless it agrees in writing to waive it. Getting that waiver is a negotiation you conduct from a weak position, and short sale approval letters sometimes reserve the lender's rights in language sellers do not read carefully.

Inside a bankruptcy case, the deficiency is general unsecured debt — and it is discharged along with your credit cards and medical bills. That is the structural advantage, and it is why sequencing matters so much.

For comparison, Massachusetts foreclosure deficiency has its own rules: under G.L. c. 244 §§ 17A and 17B, a lender seeking a deficiency after foreclosure must send notice at least 21 days before the sale and file suit within two years. Those protections do not automatically extend to a negotiated short sale, which is contractual.

Sequencing: Before, During, or After?

Short sale first, then bankruptcy. You are negotiating the deficiency waiver yourself, without leverage. If the waiver fails, you may end up filing anyway — having given away the asset for nothing.

Short sale during the bankruptcy case. The deficiency becomes dischargeable unsecured debt. This is usually the strongest position, and it is why the court-approval step is worth the added months.

Bankruptcy first, then sell after discharge. Clean, but only works if you can hold the property that long and the lender is not moving to foreclose. In Chapter 7 this can be quite fast.

This is a legal strategy question, not a real estate one. Your bankruptcy attorney should drive it. Our role is to tell you what the market will actually bear so the strategy is built on a real number.

What Slows a Massachusetts Short Sale Down

• A second mortgage or HELOC. The junior lienholder has to agree to release its lien for a token payment, and it has little incentive to hurry.
• Condo association liens. Common in Quincy, Braintree, and Framingham condo inventory; these get paid before the mortgage sees a dollar.
• Servicer transfers mid-review. The file restarts. It happens more than it should.
• Municipal tax liens and betterments.
• Buyers who cannot wait. A short sale in bankruptcy is not a transaction for someone with a lease expiring in 60 days.

Frequently Asked Questions

Can you do a short sale during bankruptcy in Massachusetts?

Yes. You need lender approval for the short payoff and bankruptcy court authorization under § 363. Both are required, and the sale cannot close until both are in hand.

What happens to the deficiency?

In bankruptcy, it becomes general unsecured debt and is discharged with your other unsecured obligations. Outside bankruptcy, you have to negotiate a written waiver from the lender.

Is it better to short sell before or during bankruptcy?

Usually during, because the deficiency becomes dischargeable. But sequencing is a legal strategy decision. Talk to your bankruptcy attorney before you list, since the order is hard to undo.

How long does it take?

Four to eight months in Massachusetts. Lender review alone commonly runs 60 to 120 days; court approval adds 30 to 60. Running them in parallel is the only way to compress it.

Do I owe taxes on forgiven mortgage debt?

Forgiven debt can be taxable income, but debt discharged in a bankruptcy case is generally excluded under the Internal Revenue Code. This is a real advantage of the bankruptcy route — confirm the specifics with your tax advisor.

Will a short sale hurt my credit more than foreclosure?

Both are serious negative events. If you are already in bankruptcy, the bankruptcy filing is typically the dominant factor on your report, and the short sale adds comparatively less. Rebuilding timelines vary by lender.

What if my second mortgage holder refuses?

The sale cannot close without a release from every lienholder. Junior lienholders sometimes accept a few thousand dollars to release. If yours will not, and you are in Chapter 13, ask your attorney whether the lien can be stripped instead.