Foreclosure or Bankruptcy, What to Do When Loan Modifications Don’t Work
Although there are many steps a homeowner can take to avoid losing their home and qualify for a loan modification, loan refinance or other financial rescue procedure, the sad reality is that many homeowners will lose their home. If you are struggling with your payments and trying to get a loan modification you need to accept the possibility that you may lose your home.
The question is what will you do?
Would you declare bankruptcy or simply foreclose on your mortgage?
This is a very complex question. This chapter will try to provide practical information to help you make an educated decision but the best advice is to contact a bankruptcy attorney that can guide you through the minefields of bankruptcy law and help you make a good decision based on your specific circumstances. Now we have that disclaimer behind us, let us have a closer look at our options.
When trying to work out which is the lesser of two evils, foreclosure or bankruptcy, it is worth comparing the pros and cons of each choice.
1) A foreclosure will remain on your credit report for 7 years while a bankruptcy will stick to your report for 10 years.
2) Lenders will view more seriously someone that forecloses on their home than a borrower that declares bankruptcy that doesn’t include a home. Generally a foreclosure leaves a bigger and longer lasting stain on your credit report.
Bankruptcy is an ugly book with many chapters.
Declaring bankruptcy is not easy, there are different ways to file for bankruptcy and you don’t even have to include all your debts. For instance, if you are still paying for your car you will probably want to continue paying for it so you are not without transport.
Bankruptcy in the United States is controlled by federal laws and handled by federal courts, although local state laws also come into play. The two mast common types of personal bankruptcy are Chapter 7 and 13. If you file under Chapter 7, you are allowed to keep some of your assets. Which assets you are allowed to keep will depend on your State’s specific laws. The rest of your assets are turned over to a court appointed trustee that liquidizes them to pay your lenders. This is one of the many reasons it is a good idea to hire a good bankruptcy lawyer, you need to understand your local laws on bankruptcy in order to make a good decision. Unfortunately, as with physical death, dying financially actually costs you money; you need to pay to be broke.
If you file under Chapter 13 you pay all your debts under a plan designed by the court. A court appointed trustee will collect your payments, satisfy lenders and make sure you stick to the plan.
If you are a business owner there is another option you want to consider carefully, and that is filing bankruptcy under Chapter 11. One of the advantages is that you can get to keep your business as long as the court and your lenders agree to a plan to payback your debts. However, if the court decides you need a trustee to check on you; you will effectively lose control of your business and its assets.
As you can see choosing what to do when you are losing your home is like deciding which limb you would like to lose –very difficult.
Other Options to Consider
As well as foreclosure and bankruptcy there are other options worth considering that might be softer on your credit score and overall stress. These require you talking with your lender and negotiating a faster and cheaper way out for both of you.
You can try a “deed in lieu of foreclosure” this arrangement involves handing over your home to the lender and walk away without owing, or owning, anything.
If your home is underwater, or worth less than the value of the mortgage, you can always try to negotiate a short sale with your lender. This means selling the house at a loss. Depending on your lender and the State you live in you might still owe your lender the difference. Even if you don’t owe your lender anything after a short sale you might still owe the Government in taxes, as unpaid loans are often considered by the IRS as declarable income.
A final option is to ask your lender to hold off from a foreclosure while you try to sell your home. This is a great option if your house is not underwater and you can at least pay for your mortgage from the proceedings of the sale.
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- Bankruptcy, Foreclosures, Loan Modifications and Ethics
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