The market turndown has caught many in the glare of the economic realities of poor financial planning. For some the decision was thrust upon them by disruptions caused by a job dislocation or a medical emergency. For others, the cookie jar was slammed hard on their "I can't lose philosophy" of real estate investing. Either way, hard choices have to be made and the answer tastes as sweet as a large dose of cod liver oil. MSNBC, Which is worse: foreclosure or bankruptcy?:
Neither option is going to be easy. Generally, a foreclosure will remain on your credit report for 7 years, while a bankruptcy remains for 10 years. But that doesn’t mean foreclosure is necessarily the better option, according to Ray Hooper, Education and Housing Director for the Consumer Credit Counseling Service of Greater Dallas, a non-profit agency that tries to help people facing foreclosure keep their homes.
“A foreclosure is very serious to mortgage lenders,” said Hooper. “They’re going look at a foreclosure more seriously than they will a bankruptcy that doesn’t include the house.”
Before you accept that foreclosure is a foregone conclusion, consider trying to avoid it. If you’re having trouble making payments, or even behind by a month or two, contact your lender before the process goes any further. Even if you’ve gotten an official “notice of default,” saying you’re several months behind, you still have time before the formal foreclosure process begins.
The first question you need to decide is whether you want to keep your house or give it up. If you want to keep it, you need to try to work out a plan to get back on track. This involves either making up for the missed payments – which you can do all at once or try to spread out – or coming up with a new plan. One option is to have the loan modified – at a lower interest rate, for example. Or you can ask for “forbearance,” which basically means the lender suspends payments until you can get back on your feet. If you’re in over your head and bought too much house, though, these options probably aren’t going to help.
So you may have to consider moving. Even if you do lose your house, you don’t want a foreclosure on your record when you go looking for a smaller house or a place to rent. One option is to ask the lender to hold off on foreclosing until you sell. If your mortgage is bigger than your house is worth, your looking at what’s called a “short sale” and you’ll owe money to the lender even after the house is sold. In some cases, lenders will let you off the hook for that amount rather than go through the expense of foreclosing. (But you may not be completely off the hook: you may owe taxes on that amount.)
You can also try something called a “deed in lieu of foreclosure” – which basically means you turn over your house to the lender and walk away without owing anything. But you’ll need to work this out with the lender: you can’t just leave the keys in the mailbox.
While it’s possible to work out one of these solutions with your lender on your own, you may have better luck with the help of someone who specializes in the process. A good attorney who knows real estate law can help, but you may not be able to afford that. A credit counselor (from an accredited, non-profit agency, not the slime balls who spam you with bogus promises of making your debts “go away”) is another option. Lenders are more likely to go along if a competent third party is there to help smooth the process.
If all else fails, you may have to consider allowing foreclosure to proceed – or filing for bankruptcy. But like most aspect of personal finance, there’s no “one-size-fits-all” guidelines for which is the least bad alternative. There are different ways to file for bankruptcy, and not all of your debts have to be included (for more, see the next page.) So even if faced with bankruptcy, you’ll need advice from someone - either a good credit counselor or a bankruptcy attorney - who can walk you through the choices you’ll face.
