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.
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.
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.
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
coach, i get that the credit score isn't important, but the key is will you be needing credit in the future? i ask because that would probably be my key thought if i were in your shoes. allowing the lender to have the property through foreclosure will hurt your score of course, but if you continue to pay the other debts you have, that'll give those creditors reason to believe in you down the road.
of course, if you file for bankruptcy, and eliminate those debts, you'll not likely be able to obtain any new credit for a few years.
i think i'd let them have the house and keep the other debts and make those payments. you didn't say they were unaffordable, so i'm assuming they are within your budget.
of course, if you file for bankruptcy, and eliminate those debts, you'll not likely be able to obtain any new credit for a few years.
i think i'd let them have the house and keep the other debts and make those payments. you didn't say they were unaffordable, so i'm assuming they are within your budget.
I live in MI and have 2 mortgages. Can you file a deed in lieu with 2 mortgages? My husband's unemployment extensions are ending. he works a few hours a week through a temp agency. The value of my house will never reach the selling price. I feel like a am sending $1200.00 per month into a black hole. I am also 5-6 years from retirement. I will not be able to sell my house for what I paid for it in the future. Easily, I can walk away from this house & move into something at half the costs. I am not late with any payments. What are my options?
Hi goladygo,
Applying for a deed in lieu of foreclosure will be a good option for you. However, it will be the discretion of both the lenders whether or not they would accept your request. Also note that though your first lender accepts the request, you would be liable to pay off the second lender. In most cases, the property sale will not satisfy both the loans. Thus, the second lender can demand his dues from you.
Take care
Applying for a deed in lieu of foreclosure will be a good option for you. However, it will be the discretion of both the lenders whether or not they would accept your request. Also note that though your first lender accepts the request, you would be liable to pay off the second lender. In most cases, the property sale will not satisfy both the loans. Thus, the second lender can demand his dues from you.
Take care
excellent post. and i must say that i'm quite overwhelmed with the replies. i think that bankruptcy is the one right for me because if i would aim for a clean record for foreclosure, i can't.
Mortgage payment on time, HOA dues in arrears $900.00, HOA started foreclosure proceedings. $20,000 in medical bills and approximately $1,000 in other debt. Car payment one month in arrears. Not enough income to handle daily life, i.e, car repairs, house repairs, etc. Do I consider Chapter 7, let them foreclose or both?
You can consider filing Chapter 7. However, if there are any back taxes, it won't get discharged in bankruptcy. If you want to get rid of the property, you should reaffirm the mortgage and surrender the property to the lender. He will foreclose it and try to recover his dues.
i am about 45.000 in credit card debt and owe 140.000 on my house , that would be lucky to sale for 110.000 , i have been ofered a make home afordable at 933.00 for 3 months, from 1150.00 month but it is hard to even come up with the 933.00 should i just file on all.
My partner and I bought a home in 2007 in FLORIDA. The market 'happened' and my income took a drastic turn. When we bought the home, my partner was the only one on the loan, however, I am on the deed AND signed the mortgage note at closing. [but it's not on my credit] With the drop in both of our income, our debt and mortgage is extremely overwhelming. We have come to the decision that my partner file BK-7 to eliminate a huge part of our debt. And since the loan modification offer is not feasible, we may have to include the home in her BK-7. So, a part of my question is: Since I have signed the mortgage note and my name is on deed, will the bank come to me for payment if she files the house in with her BK-7? Also, if the house in included in Bk-7, does it still go into foreclosure too? Will iI still have a BK and a FC on her credit...or just a BK?
if you sign a note, then you are on the note. you can't sign something and then claim it isn't relevant. if she's filing bankruptcy, and you are on the promissory note as a borrower, then the lender will, of course, seek payment from you. when you signed the note, you became 100% liable for the debt. you remain 100% liable.
if nobody pays this mortgage, i believe you can count on it becoming a foreclosure.
if nobody pays this mortgage, i believe you can count on it becoming a foreclosure.
OK here is my case: Been trying to get loan mod through CHASE and they are totally stringing me along and keep making me do a payment forebearance agreement on an amount that is 800 more than my normal payment. I cant continue to make it and Chase is not providing a solution. I hired I lawyer and he advised me to leave the house. My family and I want to keep the house. I think my option is BK13 but I was told with trustees fees that may payment would not go down very much compared to the one I currently cant pay Chase. Is this true? Please help as I am running out of time and it may sound silly but I want to keep my home!
As far as I know, the repayment plan that would be given to you by the lender in Chapter 13 would depend upon your present financial situation. If you pay off according to the repayment plan, you will be able to clear off the dues within 3-5 years. Once you pay off the dues, your bankruptcy would be discharged. You should speak to a bankruptcy attorney in this regard and take his opinion on this issue.
My wife purchased a home in Las Vegas almost 5 years ago and she got a 5/1 interest only loan which will be adjusting in July. We will not be able to afford the payment and we do not qualify for modification. We don't know whether we should just let the bank foreclose or if she should file Chapter 7. Any Ideas?
hi tdog,
if you want to get rid of the property, then you can go for deed in lieu of foreclosure in order to sell off your property. you will have to surrender the property to your lender. he will sell it off to recover the dues. the deficient amount that arises from the sale would be forgiven by the lender. this would be a better option rather than filing bankruptcy or going for a foreclosure.
if you want to get rid of the property, then you can go for deed in lieu of foreclosure in order to sell off your property. you will have to surrender the property to your lender. he will sell it off to recover the dues. the deficient amount that arises from the sale would be forgiven by the lender. this would be a better option rather than filing bankruptcy or going for a foreclosure.
I signed for a house for my son I have never lived in the house he and his wife paid the mortgage for two years until he lost his job he could not pay the mortgage any longer and have moved out. I cannot pay it and have put it up for sale I just want to get rid of it What can I do.