When an individual hits a rocky patch financially, they are often faced with difficult decisions. In today’s tough economic times, many people are faced with the possible loss of their home. In searching for options to save their home, many people consider bankruptcy. Bankruptcy has a different set of pros and cons than a home foreclosure. For the unlucky people trying to make this difficult choice, there are some real differences to consider first.
With a home foreclosure, a borrower has fallen behind on their monthly mortgage payments, and the lender is threatening to foreclose. In the foreclosure process, a mortgage holder takes the property back from the home owner in repayment, or partial repayment, for the mortgage debt that is unpaid. The home is sold either at sheriff’s sale or at some other courtroom proceeding, in order that the bank be repaid. The most difficult part of a foreclosure is losing ones home. The default on the mortgage debt will remain on a homeowner’s credit report for seven years, and can cause the borrower to be turned down for additional credit. But after a number of years, this default is treated as any other blemish on a credit report. In other words a borrower can eventually rebuild their credit and regain a good credit score. For the homeowner that is unable to afford their home, even if they can work out a plan for the bank, a foreclosure may be difficult but necessary. The short term affects are the same as any other credit default.
In a bankruptcy proceeding, a borrower seeks to either set up a repayment plan or discharge their existing debt. This debt can include any unsecured loans, credit cards, or secured loans on homes and cars. While certain debts cannot be discharged in bankruptcy, it’s also true that recent bankruptcy law changes may force a debtor to repay some or all of their debt. The reason bankruptcy is a difficult choice is because the debtor is defaulting on all of their debts from multiple lenders, not just a single debt as with a home foreclosure. In bankruptcy, even if the debtor repays some of their debt, lenders will look at it suspiciously for years. One of the benefits of bankruptcy is that if you have steady income, you can work out a repayment plan that might allow you to keep your home for example. This is the main reason many borrower seek bankruptcy protection instead of allowing their home to go to foreclosure. If you aren’t able to make payments under a bankruptcy repayment plan however, perhaps because of job loss, your house will still go to foreclosure even in the bankruptcy process. Bankruptcy does not prevent foreclosure, it may only delay it.
So which should you choose, foreclosure or bankruptcy? If you really want to keep your home, and you’re able to make payments on the note if you reorganize your debt, you may elect to go to bankruptcy court. If however you cannot afford the home at all, and if ending your mortgage payments will allow you to bring other debt current, you may have to make the hard choice to allow the bank to foreclose, and avoid bankruptcy which can have worse credit implications.
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