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Foreclosure vs bankruptcy - Which is right for you?

Posted on: 20th Mar, 2008 03:11 am
if you're behind on your mortgage, and there aren't any alternatives available to help you get out of the problem, you'll have to decide between foreclosure and bankruptcy chapter 13.

when to file chapter 13 and why


when you have to decide upon foreclosure vs bankruptcy, the first thing to ask yourself is whether you'd like to keep the house. if you're keen on keeping the house, filing for chapter13 makes sense. this helps you to pay off all or part of the mortgage, especially the amount by which you're behind on the loan. the payoff period in chapter 13 is quite short, that is within 3-5 years. however, you'll have to go through credit counseling session within 6 months prior to the date of filing bankruptcy. then you'll have to pass through the means test which confirms whether you're eligible for chapter 13.

more about chapter 13


when you file for chapter 13, you must create a repayment plan and submit it with your petition. the court appointed trustee will then review the repayment plan with your attorney and your creditors. the trustee will then negotiate with your attorney and lender if any alterations to the repayment plan are needed.

once your bankruptcy petition has been filed, your lender is barred from suing you in foreclosure during the bankruptcy proceeding and for at least 30 days after your case has been closed.

the question of foreclosing at the end of the 3-5 year period doesn't arise if you have cleared the debt and are able to continue paying down the outstanding balance. however, you will have to wait 1-2 years after your bankruptcy case has been finalized to try for a refinance.


foreclosure vs bankruptcy chapter 13


chapter 13 shows you've tried to clear debts instead of avoiding them, and this has a more positive impact on your credit report than foreclosure does. however, if you fail to reorganize your debts and catch up with the payments, the bank is likely to foreclose after your bankruptcy, and then you'll have both bankruptcy and foreclosure on your credit. so, you shouldn't miss any payments under the chapter 13 plan or the court will dismiss your case and then you'll have no option but to go through a foreclosure.

another positive aspect of chapter 13 is that it helps you keep your home. but when you end up in foreclosure, you may lose the house and if the house doesn't sell for the total amount of the loan, the lender will file a deficiency judgment. this will be reported on your credit report and is likely to affect your credit.

there are tax issues involved with deficiencies. if the lender forgives the deficiency you will have to report the forgiven amount on your federal income taxes. however, even though you report that the deficiency was forgiven, does not mean you will have to pay taxes on it. as of 2009, the irs does not require you to pay income tax on money forgiven due to a foreclosure.

credit effects - foreclosure vs bankruptcy


once you file bankruptcy, the creditor/lender can no longer sue you to collect on a debt until the it has been discharged. once it has been discharged, you can rebuild your credit in 2 years. by the time you get served with the summons for foreclosure, your credit score has already taken a hit. by the time your lender takes possession of your home after the sheriff's sale, you will be facing at least another 5 years of rebuilding your credit.

bankruptcy stays on your report for 7 years, but it doesn't affect your credit rating after the initial hit. the best thing is, since you get an automatic stay from collection activities after you file, your credit score will freeze until the bankruptcy process is complete. so, it's better to have a 650 score with bankruptcy instead of a 480 score and a foreclosure.

bankruptcy is an option that will help you to avoid foreclosure. but when it comes to deciding on foreclosure vs bankruptcy, you have to decide which option will work better in your particular situation. so, the best thing to do is to contact your lender and start to negotiate a loan modification as soon as you realize you cannot afford your current mortgage payments any longer.


related forum discussions
This is really helpful information. But I would like to ask you can I file BK 7 instead of BK 13 to avoid foreclosure? Are there any advantages if file BK 13? What are the problems that I may face if I file BK 7 instead of BK 13.

Thanks in advance.
Posted on: 20th Mar, 2008 04:53 pm
Larry,

The advantage that I see is you get to preserve your home in Chapter 13 but in Chapter 7, your assets are liquidated, so there is chance that you may lose a part of your home equity or the entire home. In such a case, the trustee sells off your home and offers you a part of the proceeds, that is up to the exempted value. Also, Chapter 7 gives you a greater hit on the credit report compared to Chapter 13.
Posted on: 25th Mar, 2008 04:43 am
Hi,

BK chapter 7 hits your credit much more than chapter 13. In chapter 13 you are actually trying to pay off the mortgage with an affordable plan and that leaves a positive impact on your credit report. And at the same time you can still be able to stay on your house.

Do let me know if you have any other questions.

Thanks
Blue
Posted on: 25th Mar, 2008 05:27 pm
We got discharged from ch7 in 2004. but we did not include the home in Bk and we regret for not having done so. We went into trouble with our ARM and refinanced into 30 yer fixed but now I don't have anything to pay it for as we are on a limited budget. The mortgage company suggested foreclosure but before it hits, we'll get 30 days to rent an apartment and after the sale occurs we'll go to a credit repair agency that will remove the foreclosure from our report. Has anyone tried this??is it that easy to remove it from credit report?? My husband feels it may be a government program to help us get a lower rate or repair the home to sell it. But I haven't heard of such a thing. Pls advise if this is th right way to go for it or should I think of bk? Because I've already had one.
Posted on: 02nd Apr, 2008 09:57 pm
Hi Rosaline,

Welcome to the forum.

I do not think you can just remove the foreclosure from your credit report so easily. It will remain on your credit report for 7 to 10 years and also you will loss the property. So better you can think about filing Bankruptcy.

I think you can be able to file bankruptcy as you were discharged 4 years ago. Contact with a bankruptcy attorney in this regard.

Feel free to ask if you have any further questions.

Best of luck,
Larry
Posted on: 02nd Apr, 2008 11:10 pm
Great article thank you for investing the time to write it and post it here, I am sure that it will help many.
Posted on: 20th Apr, 2008 12:35 pm
I never quite understood the difference in bankruptsy or foreclosure. Excellent post. I sure wish they would get this economy turned around before too many people lose their home.
Posted on: 21st Apr, 2008 04:10 pm
I agree but even 1 person losing their home due to the economic slide is 1 too many. Most people have put their hearts and souls in to having a place to call home. What a loss it would be to lose the roof over your head. This is a very good post.
Posted on: 21st Apr, 2008 04:12 pm
Really good article, people need this type of information to make the right decision.
Posted on: 03rd May, 2008 05:43 pm
I am new to the forum, I am really impressed with the quality of information that is on here. This article in particular goes into such great detail on every aspect of the subject.

Awesome information put in a way that everyone can understand, great job here, hope to read some more of your articles like this one on here.
Posted on: 24th May, 2008 10:21 am
You will find some really good and useful information here that is put into simple terminology so that it is easy to understand. welcome to the forum erb, really nice to see you here.
Posted on: 25th May, 2008 07:44 am
My husband and I bought a home when we were 18... we had a baby on the way and the end of the pregnancy got really bad. I was in the NICU when we signed closing papers at the Ronald McDonald House. We were forced into this and it kept us from being able to get all of the inspections done. Furthermore, the sewer system was bad. Two weeks after my son died we moved into the house we bought, to move out just two weeks later when the sewer collapsed... a situation the previous owners were aware of but did not disclose. We are approaching litigation date for this, but if we do not when (5 years and more than $100,000 later - Mortagage, lawyer, and utilities) we may have to file bk as it is still unlivable. We have a second home in the town that we moved to to make more money, and would like to keep it. Can you explain my options here? We currently have a perfect credit score, but we cannot continue two house payments and we cannot rent it out. We do have some other debt and have been making all of these payments until now on our own. How long is the process for Ch7 bk? Ch13 bk would not help us at all would it?
Posted on: 25th May, 2008 05:42 pm
Hi Guest,

Welcome to the forum.

Why did you buy a home without "all of the inspections ". Chapter 7 is not a good option for you because in case of chapter 7 all you non exempt properties will be sold to pay off the creditor and it will have a huge negative affect on your credit.

If you cannot afford the mortgage payments, then talk to your lender ASAP. If you cannot even afford any repayment plans then try out short sale and pay off your lender. It will not affect your credit much.

Feel free to ask if you have any further questions.

Best of luck,
Larry
Posted on: 26th May, 2008 02:36 am
We did not have a down payment on the first house and cannot even afford the payment this month. There is no way it will sell to cover the price. My Dad's 3 bedroom on the lake just went for 18,000 in working order, and our 4 bedroom in town has a bad sewer system. The lender would not even defer one payment for us. They said that they would not even allow us to refinance. The house was 89000 when we bought it, but being in a farm town, no one is buying homes there anymore. We only have 10000 of equity in it. Why would a short sale hurt so badly? Wouldn't it still rebuild our credit since we are still paying on the house that we do live in and our van and everything else? Are there any other options to get rid of the house without taking on a ton of debt. I mean we are very literally without any money to spare. Last month I had to put groceries on a credit card.
Posted on: 26th May, 2008 05:23 am
Posted on: 26th May, 2008 05:29 am
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