The Strategic Advantage: Bankruptcy Attorneys Should Encourage Short Sales Before Filing

Bankruptcy is a powerful legal tool designed to give individuals and businesses a fresh start. However, the path to that fresh start can be riddled with complications if assets are not handled strategically prior to filing. One of the most common sources of confusion, liability, and ongoing financial stress for debtors is an underwater home—especially when the value of the property is far below the amount owed.

Bankruptcy attorneys often focus on the discharge of unsecured debt and the protection of exempt assets, but the disposition of real estate—particularly encumbered real estate—deserves early attention. At Case By Case Short Sale Solutions (CBC), we have worked alongside Chapter 7 trustees, debtor attorneys, and banks in 38 U.S. states to help resolve real estate issues before bankruptcy is filed. One of the most effective strategies we advocate for is completing a short sale before the bankruptcy is initiated.

This essay outlines the legal, procedural, and financial advantages of a pre-bankruptcy short sale. It also explains how attorneys can streamline their caseloads, improve outcomes for their clients, and even recover fees by integrating short sales into their pre-petition strategy. Drawing on over a decade of experience, we show how collaboration between bankruptcy professionals and real estate specialists can turn a liability into a tool for a cleaner, more efficient bankruptcy process.

Many bankruptcy filers are homeowners facing foreclosure, delinquent mortgage payments, or homes that are significantly underwater. These properties often carry not just primary mortgage debt, but also second liens, unpaid taxes, HOA dues, and maintenance costs. For debtors, this creates a continuing financial burden even after bankruptcy is filed. For attorneys, it complicates case preparation, post-petition administration, and trustee communication.

If a debtor surrenders the home in bankruptcy, that does not guarantee the lender will foreclose quickly—or at all. In some cases, the bank may delay foreclosure indefinitely, leaving the title in the debtor’s name, which leads to ongoing responsibilities and legal exposure.

From the attorney’s perspective, this creates problems:

• Post-petition liability for HOA dues or code violations.
• Uncertainty regarding exemptions or secured creditor treatment.
• Delays in discharge or closure of the case.
• Additional client questions or legal issues long after the case has concluded.

A better solution often lies in disposing of the property before the bankruptcy is filed.

1. Simplified Case Filing

   When the real estate has been sold, the bankruptcy schedules are significantly cleaner. There is no need to list the property as an asset or liability, no need to disclose anticipated foreclosure actions, and no risk of post-petition obligations continuing to accrue.

   Attorneys benefit from fewer complications in preparing Schedules A/B and D, reduced likelihood of trustee inquiries, and more efficient 341 meetings. The client benefits from peace of mind and a cleaner financial slate.

2. Elimination of Post-Petition Liability

   When a home remains in the debtor’s name after bankruptcy is filed, the debtor may continue to be liable for HOA dues, municipal fines, or property taxes. Even if the mortgage is discharged, these other obligations may not be. In contrast, a pre-bankruptcy short sale transfers ownership cleanly and eliminates such liabilities before they begin.

3. Strategic Control of the Process

   Once a bankruptcy is filed, the automatic stay goes into effect, and all actions involving the debtor’s property must be approved by the court. This includes any potential sale of real estate. While post-petition sales can still occur, they require court approval, trustee participation, and longer timelines.

   By completing the sale prior to filing, attorneys maintain control over the transaction, avoid the need for court approval, and eliminate delays caused by scheduling hearings or responding to trustee inquiries.

4. Negotiated Attorney Fees

   CBC has worked with attorneys and lenders nationwide to structure short sale settlements that include the debtor’s legal fees. In many cases, banks are willing to cover reasonable attorney fees as part of the sale proceeds, particularly when the transaction resolves a distressed asset and prevents foreclosure.

   This means the attorney can be compensated for their time spent facilitating the short sale—without increasing the debtor’s financial burden. In an era when Chapter 7 legal fees are under increasing scrutiny, this is a rare opportunity to add value to the case while maintaining compliance.

“Will the client lose protection if we delay filing?”

Timing is everything. If the client is at immediate risk of wage garnishment or utility shutoff, then filing right away may be necessary. However, in many cases, clients are still current on their mortgage or have a short runway before foreclosure proceedings begin. During that window, a pre-bankruptcy short sale can be pursued. Moreover, the short sale process itself may delay foreclosure while negotiations are underway, giving the client breathing room without immediate need for protection.

“Will the bank even approve the short sale?”

Yes—especially when it’s presented professionally. CBC has successfully negotiated short sales in 38 states and with nearly every major bank operating in the U.S. Our long-standing relationships with bank loss mitigation and bankruptcy departments allow us to obtain timely approvals and navigate complex lien scenarios. When banks know a bankruptcy is forthcoming, they are often more motivated to approve a short sale because it provides a clear, recoverable path forward versus the uncertainty of bankruptcy or foreclosure.

“Does this delay the overall process?”

On the contrary, it accelerates it. Filing a case with unresolved real estate creates post-filing issues that can drag on for months or even years. A short sale completed before filing results in a faster path to discharge and case closure. It also reduces the need for amended schedules, stay relief motions, or coordination with trustees—saving time for both the attorney and the court.

At CBC, we’ve assisted thousands of clients and attorneys in executing short sales across 38 states. In many of these cases, the short sale allowed the client to:

• Avoid foreclosure.
• Resolve junior lien obligations.
• Eliminate HOA debt.
• Exit the property with dignity.
• Enter bankruptcy with a cleaner financial profile.

We’ve negotiated settlements where lenders:

• Released all liens.
• Agreed not to pursue deficiency balances.
• Paid attorney fees for the debtor’s counsel.
• Covered relocation expenses through government incentive programs.

These aren’t theoretical outcomes—they’re everyday results when the process is handled properly, early, and with professional support.

Our process is designed to complement the attorney’s role and reduce their workload. Here's how we partner with attorneys to support pre-bankruptcy short sales:

1. Initial Review and Feasibility

   We evaluate the property, loan balance, and title to determine whether a short sale is viable. We also assess foreclosure timelines and bankruptcy triggers to determine the best window for filing.

2. Lender Engagement

   We contact the lender, initiate the short sale request, and prepare the necessary documents. Our experience with bank systems allows us to cut through red tape and avoid common delays.

3. Negotiation of Liens and Fees

   We negotiate directly with all lienholders, including junior liens and HOA debts, and structure the deal to include all allowable fees—including attorney compensation where possible.

4. Sale Completion

   We coordinate with title companies, real estate agents, and closing attorneys to ensure a seamless transaction. Once the property is sold, the net proceeds go directly toward lien settlement, and the client exits the transaction with no deficiency or future liability.

Short sales aren’t appropriate in every bankruptcy case. However, attorneys should strongly consider this strategy when:

• The client owns a home that is underwater or delinquent.
• The home has more than one lien.
• The client wishes to relocate or walk away from the property.
• The bank has not yet begun foreclosure proceedings.
• The client has a flexible timeline before bankruptcy is necessary.

In these scenarios, a pre-filing short sale provides resolution—not complication.

Short sales offer bankruptcy attorneys a strategic tool to resolve complex real estate issues before they become legal entanglements. By encouraging clients to pursue a short sale prior to filing, attorneys can simplify the case, protect their client’s interests, and even recover professional fees—all without delaying the ultimate goal of a fresh start.

With the right partner, such as Case By Case Short Sale Solutions, these transactions become manageable, predictable, and beneficial for everyone involved.

In the current economic landscape, bankruptcy attorneys must be more than legal technicians—they must be strategic advisors. Encouraging clients to short sell their homes before filing is one of the smartest moves a bankruptcy attorney can make. It aligns the legal process with the financial realities of the debtor, reduces the court’s burden, and improves recovery for all parties.

At CBC, we’ve built our model around this principle. With experience in 38 states and a long track record of successful negotiations—including for attorney fees—we’re here to make these resolutions possible.

Short sales before bankruptcy filing aren’t just an option. In many cases, they’re the best option.