Bankruptcy vs. Foreclosure

It is a myth that bankruptcy is always worse than foreclosure. If you want to purchase real estate again, lenders typically view foreclosures, short sales and “deeds in lieu” as the same thing – they all indicate a prior inability to pay a mortgage. So, lenders do not tend to view these actions as more favorable than a bankruptcy on a credit report. Bankruptcy and foreclosure remain on your credit for the same amount of time - ten years. Here are some other important factors to consider when weighing foreclosure against bankruptcy:

Following bankruptcy, your mortgage lender and other creditors stop negative reporting on discharged debts, improving your credit. Following foreclosure, the mortgage lender and other creditors continue negative reporting, eroding your credit.
Bankruptcy may result in staying in your residence longer than foreclosure.
Bankruptcy cancels debt associated with mortgage deficiencies and other debts at the same time. Foreclosure can create a deficiency debt. The mortgage lender then chooses whether to pursue you for the debt or issue a form which can result in a tax liability.
You can be eligible to purchase a home two to four years after a Chapter 7 discharge (the court order that forgives debt). In contrast, it takes a minimum of four years to purchase a home following a foreclosure. If you have both a foreclosure and bankruptcy, you may be able to purchase after two years under some circumstances.

Saving Your Home

“If you are facing foreclosure or falling behind on your mortgage, you may still be able to save your home.”

When you fall behind with mortgage payments, the possibility of losing your home can be frightening and overwhelming. You will be flooded with advice, and trying to pick out “fact from fiction” can escalate your stress and anxiety. Receiving trustworthy information can be the difference between losing everything and staying in control during a difficult time.

Foreclosure does not occur instantly. A mortgage lender will state that your loan is “in foreclosure” before they actually commence the legal proceeding. Lenders typically wait at least two to three months, (and often four to six months), before they refer your loan to an attorney for foreclosure. In addition, mortgage lenders holding 2nd or 3rd mortgages often allow significant defaults before foreclosure because of their heightened risk of not recovering the full loan balance(s).

A bankruptcy can delay and/or prevent a foreclosure sale. Federal bankruptcy law mandates that creditors stop legal proceedings, including foreclosure, when a bankruptcy case is filed. The degree of protection moving forward then depends on the type of bankruptcy, the bankruptcy timing and whether the lender requests court permission to proceed, as well as other factors.

One powerful option may be filing a Chapter 13 Bankruptcy to remain in your home and avoid foreclosure altogether. The Chapter 13 repayment plan lets you pay mortgage arrears (late, unpaid payments) over three to five years. You must be able to make regular monthly mortgage payments plus an additional amount each month to catch up over time. A Chapter 13 Bankruptcy may also help you eliminate the payments on a 2nd and 3rd mortgage if your home is worth less then the amount owed to the first mortgage holder.

Speaking with a bankruptcy attorney should be part of your action plan so you understand your full range of choices based on your individual circumstances. It is critical that you get accurate information early because delay can result in fewer options. If you choose to file bankruptcy, your attorney will determine a bankruptcy strategy based on your goals and financial situation.

So where should you start?

Determine exactly how far you are behind in mortgage payments and where you are in the foreclosure process. This information can be found in mortgage statements and letters. You can also check your county’s public trustee website to see if deadlines have been set.
Do a budget reality check. Determine your monthly income and expenses so you can make plans based on facts. The preservation and payment of your home should come first. Credit cards and other noisy creditors should not take priority. If you conclude that you can comfortably make mortgage payments were it not for credit card/miscellaneous payments, bankruptcy should be seriously considered as an option.
Contact your lender and explain the situation. If you are current but will be unable to make payments in the near future, your lender may structure a temporary or permanent workout which reduces your interest rate, and/or temporarily lowers your monthly payments. If you are behind, they may be able to structure forbearance or refinance.
Set an initial consultation with St. Bernard Bankruptcy early in the process. We will analyze your overall situation and outline your options. This step can avoid unnecessary actions, frustration and/or lost opportunities.
Contact a housing counselor approved by the U.S. Housing Development by calling 1-800-569-4287 before giving money to anyone claiming to be able to help. These counselors should provide free or low cost guidance and may be able to represent you in negotiations with your lender. Remember: many scams sound legitimate.
Consider selling your home to preserve any equity you may have. You may want to consider short sale if you do not have equity. Talk to an experienced real estate agent. If you are considering short sale, please see our “Bankruptcy vs. Foreclosure” section be ensure that this action is appropriate for your circumstances.

Materials used for article:
“Sidestep landmines that can lead to foreclosure” by Laura T. Coffey. MSNBC online article dated June 24, 2008.
“How Bankruptcy Can Help With Foreclosure” by Stephen R. Elias. Online article at www.nolo.com