Although your immediate financial situation may be consuming you completely, you need to be informed of your options and how they will affect you, not only now, but in the future. Unfortunately there is not enough reliable information out there, and depending on who you talk to you, you will get a lot of conflicting opinions.
I have put together some information that may help. Through my own experience with foreclosure, bankruptcy, and credit issues I have come across several misconceptions that are commonly held. Hopefully this will help you make an informed decision before choosing to do a bankruptcy, foreclosure, short sale, or none at all.
Disclaimer: I am not a licensed accountant, or a certified attorney, I am just sharing my own knowledge gained from experience.
Misconceptions:
1. A Foreclosure is better for my credit than a bankruptcy
Maybe; maybe not. It actually depends who you talk to on this what answer you get, but ultimately it depends how the action is reported to the credit agency, and how many other negative reports are filed; like the number of ‘late payments’, or ‘non-payments’ related to your mortgage.
A bankruptcy may even “hide” a foreclosure if the property is included in the bankruptcy. This is no guarantee though. To be safe, always try to sell your property, and use a ‘short-sale’ if necessary (if it is included in a bankruptcy) rather than let it go to foreclosure. If the short sale is reported it will show up as a ‘settled debt’ rather than a ‘foreclosure’ (basically a repossession for non-payment, with none of the debt being satisfied). This will also lessen your liability for a ‘deficiency judgment’ later on.
2. I can save my house from Foreclosure if I file Bankruptcy
Actually one has nothing to do with the other. The only thing a bankruptcy does to a foreclosure is that it will slow the process and may help you reduce the amount of your payments to the bank, but you MUST PAY ON-TIME. If you don’t, you lose the protection of the bankruptcy, and the foreclosure process resumes.
However, this is only in a chapter 13. In a chapter 7 your house gets no foreclosure protection – you either keep paying or you’re going to lose it to a foreclosure. (I would recommend a short sale here instead to limit your liability to further credit damage and a larger ‘deficiency judgment.’
3. To Avoid a Bankruptcy, I should use a Debt Management Program to lower my Payments
I’m not supporting bankruptcy necessarily, but an attorney has more leverage to negotiate a lower debt payment for you, as in a chapter 13. If you want to avoid bankruptcy all together, be VERY careful which debt management program you choose to use. If they require a payment upfront HANG-UP the phone immediately; NO MATTER WHAT they tell you! Avoid these services like the plague; I didn’t and my mistake cost me $1400 and a lot of headaches. Don’t let this happen to you. Use a Non-Profit company that only charges a small monthly fee.
If your ultimate goal is to keep your house, and you have the income to do so, your best option is to work with the bank first to see what options are available, and then a chapter 13 bankruptcy. If you are out of money, just focus on saving your credit. To do this don’t let the bank foreclose, instead, find someone you trust to handle selling your house using a short sale as quickly as possible. You may want to file a chapter 7 bankruptcy depending on your amount of other debt and your amount of assets; Or if you can afford it, work with a debt management company to lower your payments on your unsecured (credit cards) debts.
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