Foreclosure Without Bankruptcy
Foreclosure and bankruptcy are mutually exclusive events. Your home can go into foreclosure without you having to file bankruptcy and vice versa. You should avoid both if possible. foreclosure is not as bad as bankruptcy, but the fact that you defaulted on your mortgage and lost your home is not viewed favorably by lenders, according to Experian.
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Foreclosure Process
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A bank can begin the foreclosure process on your property as early as 60 days from your first missed payment. During this time you will receive several notices to bring your account current. The final communication is a notice of sale, which sets the auction date for your home. During this time, the fact that you have been delinquent on your mortgage is reported to the credit rating agencies which affects your credit.
Deficiency Judgment
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The sale of your home through foreclosure does not let you off the hook. If your loan has a balance after the foreclosure sale, your mortgage company can seek a deficiency judgment to pursue the remaining balance. In general, the higher the balance, the greater the chances of the bank pursuing a deficiency judgment.
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Short Sale
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Avoid foreclosure if you can at all costs. An available option is finding a willing buyer to take the property off your hands. If you sell your house for less than the value of the mortgage, it is referred to as a short sale. While this may not be the most desirable outcome, it certainly beats losing your home outright. When your property is sold in a foreclosure sale, it goes to the highest bidder. In many instances, this amount will be lower than the principal balance. By doing a short sale, you may be able to negotiate a higher selling price for your house than if it is sold through foreclosure.
Bankruptcy Process
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When you file a bankruptcy petition, you are given an automatic stay of protection from your creditors. You will be required to submit financial records including a list of income and expenditures, tax filings, list of all financial obligations and a statement about your financial situation. During this process, you can reaffirm some debts. Reaffirming a debt means that even though it qualifies for bankruptcy protection, you agree to continue making payments. In this case, you can opt to include your mortgage as part of your bankruptcy filing. This provides you with temporary relief from the bank as you decide whether to seek a short sale. Having your debts discharged in bankruptcy is not guaranteed. You must pass a means test to determine eligibility for Chapter 7. If your household income is too high, you may qualify for Chapter 13 instead which is a reorganization of debts with creditors.
Foreclosure Vs. Bankruptcy
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The decision to file for bankruptcy should be based on your level of debt to income. If your income disqualifies you for Chapter 7, you may be able to save your home by filing Chapter 13 to negotiate lower mortgage payments. A bankruptcy filing remains on your credit report for up to 10 years. On the other hand, if you realistically cannot afford to make your mortgage payments, you need to face the possibility of letting go of your home. Like bankruptcy, allowing the bank to foreclose is a difficult decision. You must factor in the the cost of moving and finding a new place to live. A foreclosure remains on your credit report for seven years. In either case, your credit score will be negatively affected by a foreclosure or bankruptcy.
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