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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
we need to no the law if we foreclouse or a deed in liue,are we in danger of l ooseing our property & assets in pennsylvania
Posted on: 08th Oct, 2008 09:50 pm
Hi madeline,

In the state of Pennsylvania, you may be charged with deficiency judgment in case the home sale price (if the lender forecloses) isn't enough to recover the amount you owe. However, if you go for deed in lieu, no deficiency payment will be asked for.

Good luck
Posted on: 10th Oct, 2008 05:49 am
IF YOU'VE GONE THRU FORECLOSURE AND THERE IS A DEFICIENCY JUDGEMENT, CAN IT BE DISCHARGED UNDER BANKRUPCY? THANKS
Posted on: 26th Oct, 2008 02:09 pm
Welcome FRUITLOOP,

The deficiency judgment can be discharged through bankruptcy. But the best way is to pay it off. This is because bankruptcy will drop down your credit score further. What type of bankruptcy are you willing to file? and how much is the deficiency payment?

Thanks.
Posted on: 30th Oct, 2008 01:10 am
We are already in bankruptcy for the last 1 1/2 years and due to major medical bill are unable to make mortgage payments for at least the next 2 months. HELP!
Posted on: 21st Nov, 2008 09:24 am
hi bouncerboy,

welcome to the forums.

what type of bankruptcy have you filed? is the mortgage included in it? since you're 2 months behind, you can request the lender for a work out plan if you haven't included the mortgage in the bankruptcy.

there are several loss mitigation options or work out plans available with lenders. you need to negotiate with them regarding the option that you'd like to choose. just check the loss mitigation options so that you'd get an idea on what it's all about.

may god bless you.

samantha
Posted on: 24th Nov, 2008 04:14 am
We are 1 week into foreclosure and we are trying to determine the best route to take as far as credit reputation is concerned. The loan is in my husbands name alone and he has been laid off indefinitely for the last several months. Do you think it would be better for him to do a deed in lieu being that he cannot afford the property or should he file a BK 7 (no way to file BK 13, income is very limited). This is a VA loan. Thanks for your feedback! PS we have had a loan mod already which went into default when he was laidoff. Originally he had to take a massive pay cut which caused for the loan mod request.
Posted on: 08th Dec, 2008 08:44 am
Hi Swan

I think your husband should first try for either a deed in lieu or a short sale rather than filing Chapter 7. Both short sale and deed in lieu foreclosure are similar processes. You will have to give the property to the lender and he will give you a mortgage release certificate. The lender will then sell off the property to recover the debts.

There are chances that there will be a deficient amount from the sale of the property. In deed in lieu, the lender will forgive the deficient amount whereas in short sale you will have to pay back the deficient amount to the lender.

To know more about deed in lieu and short sale, check out the following links:
Avoid Foreclosure with a Deed-in-lieu
Short Sale Affects Credit Score - how many points do you lose?

Thanks.
Posted on: 09th Dec, 2008 02:32 am
I am voluntarily giving up my home as my husband has moved out due to marital problems. The mortgage is in my name and I cannot file bankruptcy for another 2 years. If my home goes into foreclosure and my lender wont forgive the difference how am I taxed and how do I pay. If there is a deficiency of say 40,000. Do I pay all of this or do I pay a taxed amount
Posted on: 15th Dec, 2008 06:15 pm
Hi anonymous,

You should contact with the lender and check if you can get the options of either short sale or a deed in lieu foreclosure. In case of deed in lieu foreclosure, the deficient amount will be forgiven. But you will have to pay taxes on this forgiven amount as it will be considered as your income by the IRS. In case of short sale, you will have to pay the deficient amount to the lender.

Thanks,

Jerry
Posted on: 16th Dec, 2008 12:29 am
Does foreclosure of one rental property affect other rental properties that I still own?
Posted on: 17th Dec, 2008 10:44 am
Hi petrina!

Welcome to forums!

After the lender forecloses the property, there may remain a deficient amount from the sale of the property. If you cannot pay this deficient amount, the lender will have the right to place liens on your other rental properties.

Feel free to ask if you have further queries.

Sussane
Posted on: 17th Dec, 2008 11:36 pm
HELLO,
WE HAVE 4 RENTALS 2 ARE UPSIDE DOWN WITH RENTS AND VALUE,
2 HAVE LONG TERM RENTERS AND VALUE IS AT WHAT THE APPAISAL
WOULD BE. THESE WERE SUPPOSE TO BE OUR RETIRMENT. IS THERE
ANY THE BANKRUPTCY JUDGE WILL LET US KEEP 2 HOMES.
WE ARE BOTH LAID OFF FROM WORK WHICH IS WHY THE 7 INSTEAD OF
13.
THANK YOU,
CONFUSSED
Posted on: 04th Jan, 2009 01:48 pm
You may be able to save your property if you reaffirm the debts after you get discharged from Chapter 7.
Posted on: 05th Jan, 2009 01:56 am
Don't do either one! Go to "www.homeforeclosureintervention.com" and save your home! You are in charge and you can help yourself!
[Link deactivated and promotional text deleted as per forum rules. Thanks.]
Posted on: 06th Jan, 2009 06:03 am
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