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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
Welcome Guest.

The mortgage company cannot foreclose after the homeowner has filed the bankruptcy. Have you filed chapter13 or chapter7? If you have filed chapter13 then you will pay the lender off with a repayment plan and if you have filed chapter7 then all your non-exempt properties will be sold to pay off the mortgage company and other creditors.

"How should this be noted on the debtor's credit report?"
It will depend upon the kind of bankruptcy you have filed. If you have filed Chapter 13 Bankruptcy then it will stay on your credit report for 7 years and if you have filed Chapter7 Bankruptcy then it will remain on your credit report for 10 years.

Let me know if you have any further queries.
Posted on: 07th Aug, 2008 05:46 am
Because of a previous ch 7 and a whole slew of new medical bills and have got behind on my car payments I need to file a 13 will this effect my lease option agreement?
Posted on: 15th Aug, 2008 03:47 am
Hi rollingthunder,

I don't think chapter 13 would affect your lease to purchase option if you keep making payments at the right time. But i would suggest that you talk to your bankruptcy attorney once.

Good luck
Posted on: 15th Aug, 2008 04:58 am
I cannot keep my home so if I file bankruptcy does it pay off entire mortgage
Posted on: 15th Aug, 2008 05:10 pm
I have to file chapter 13 does the bankruptcy pay off entire mortgage
Posted on: 15th Aug, 2008 05:15 pm
Hi morewitt.

Welcome to the forum. Chapter13 will not pay off your entire mortgage amount. you will have to pay the mortgage with an repayment plan. I have answered your question at http://www.mortgagefit.com/bankruptcy/chapter13-payinfull.html

Please take a look at it. Feel free to ask if you have any further questions.

Best of luck,
Larry
Posted on: 16th Aug, 2008 01:58 am
Hi Morewitt,

Welcome to our forums.

The chapter 13 will not pay down your loan. It will provide you with a repayment plan with which you can pay down the arrears in your mortgage or the entire loan depending upon how much you owe. Check out if you qualify for chapter 13 .

Regards,

Jessica.
Posted on: 16th Aug, 2008 04:30 am
How will a 13 effect me getting a loan to buy the house when it is time? I am in a 4 yr lease option we have lived here for 1 yr in Oct 08
Posted on: 24th Aug, 2008 06:02 pm
Welcome rollingthunder.

How long is it before you have filed chapter13? why type of debts are included in it? have you received a discharge yet? depending upon when you receive the discharge, you can qualify for a home loan. Usually one gets a conventional loan 2 years after receiving the discharge. But if it's an FHA loan, chances are, you can qualify at a favorable rate 1 year after getting the discharge.


Thanks.
Posted on: 25th Aug, 2008 01:16 am
My husband has a few rental homes and we have two that we have been trying to sell or rent for the last 2 1/2 years and we can't get them to move. We have been strapped for to long with them and we can't make it anymore. What do we do file bandruptcy or foreclose on them? Please help. These homes are in my name and not my husbands
Posted on: 02nd Sep, 2008 11:35 am
hi guest,

i guess you have mortgages against your rental homes and that's what is bothering you more than anything. well, how much of debts are you yet to pay off? isn't there any other way you can pay off at least few of the loans? would you be comfortable making payments after filing bankruptcy chapter 13?
Posted on: 05th Sep, 2008 03:30 am
if i file chapter 7 will there be a forclosuer on the credit as well as the bankruptcy.
Posted on: 11th Sep, 2008 03:54 pm
Can I file a Chapter 13 after 3 years of filing Chapter 7?
Posted on: 13th Sep, 2008 08:09 am
Sheila,

If the lender or mortgage company forecloses after you have filed bankruptcy, well then both the negative items will get reflected on your credit report.
Posted on: 15th Sep, 2008 11:13 am
Hi guest,

Welcome to our forums.

You can file Chapter 13 whenever you want. But at the same time, there shouldn't have been any dismissal from abankruptcy case within a year of filing chapter 13.

Good luck
Posted on: 15th Sep, 2008 11:21 am
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