is it better to foreclose or file bankruptcy

Full Answer

Should you file bankruptcy before foreclosure?

While not all situations are alike, it’s generally better to file for bankruptcy protection before foreclosure. Why You Should File for Bankruptcy Before Foreclosure Preventing Deficiency Judgments If the lender seizes the house and sells it for less than what you owe, you could be held responsible for the remaining mortgage balance.

Does bankruptcy protect you from foreclosure?

Yes, filing bankruptcy can stop a foreclosure. At the very least it’ll buy you some time. Whether filing a bankruptcy case can help you prevent a foreclosure for good depends on how far behind you are on your mortgage payments and what type of bankruptcy you’re filing. But, let’s start with a few foreclosure basics, first. Foreclosure Basics

What are the differences between bankruptcy and foreclosure?

What Is the Difference Between Bankruptcy & Foreclosure?

• Function. The function of a bankruptcy is to permit an individual or business the ability to obtain a discharge of or payment plan for their debts, according to the U.S. ...
• Effects. ...
• Potential. ...
• Reaffirmation Agreement. ...
• Expert Assistance. ...

Will filing bankruptcy stop foreclosure?

Will Filing For Bankruptcy Stop Foreclosure? The short answer, yes it will. In many cases, Filing an Emergency Bankruptcy is considered the first act in foreclosure defense. While being potentially cumbersome to a home owners lifestyle; chapter 13 or chapter 7 bankruptcy are not the only ways to avoid a foreclosure sale from happening in the case of a defaulted loan.

Which is worse for your credit foreclosure or bankruptcy?

A foreclosure or short sale, as well as a deed in lieu of foreclosure, are all pretty similar when it comes to impacting your credit. They're all bad. But bankruptcy is worse. Going through a foreclosure tends to lower your scores by at least 100 points or so.

Is it better to default or file bankruptcy?

In fact, Fleischman recommends defaulting on a loan before filing for bankruptcy. If you haven't defaulted, it might indicate that you haven't given yourself enough time to allow your financial situation to improve. If you default, filing for bankruptcy can protect your assets from being seized by creditors.

What is the most significant disadvantage of filing for bankruptcy and why?

What are the disadvantages? Since your bankruptcy filing will remain on your credit record for up to ten years, it may affect your future finances. A bankruptcy is a troublesome item in your credit record, but often debtors who file already have a troublesome history.

Is bankruptcy worse than default?

Defaulting on an account and filing bankruptcy both can hurt your credit, but they're far from the same thing. Defaulting is when a borrower falls behind on payments. Bankruptcy is a legal process that you can use to get your debts discharged or get on a more manageable repayment plan.

What is the downside of filing for bankruptcy?

You could lose assets of value Depending on which type of bankruptcy you qualify for, your income, the equity in your assets and other factors, you may lose your home, your car and other valuable items. Your trustee may be required to sell these items to repay your creditors.

What do you lose if you declare bankruptcy?

Bankruptcy may help you get relief from your debt, but it's important to understand that declaring bankruptcy has a serious, long-term effect on your credit. Bankruptcy will remain on your credit report for 7-10 years, affecting your ability to open credit card accounts and get approved for loans with favorable rates.

How much debt should you be in to file bankruptcy?

There is no minimum debt to file bankruptcy, so the amount does not matter. Examples of unsecured debts include credit card debt, cash advance (payday) loans, and medical bills. Secured debts: If you are behind on a house or car payment, this may be a very good time to file for bankruptcy.

What debts are not discharged in bankruptcy?

Filing for Chapter 7 bankruptcy eliminates credit card debt, medical bills and unsecured loans; however, there are some debts that cannot be discharged. Those debts include child support, spousal support obligations, student loans, judgments for damages resulting from drunk driving accidents, and most unpaid taxes.

How much does it cost to file bankruptcy?

How Much Does Bankruptcy Cost?Type of BankruptcyFiling FeesTotalChapter 7$338$1,788Chapter 11$1,738$19,738Chapter 13$313$3,313

Will bankruptcy clear all debt?

Going bankrupt means you aren't liable for most of your debts and you don't have to pay them. Bankruptcy doesn't cover all debts so it's important to make sure you know whether any of your debts won't be covered and put plans in place to deal with them.

How can I get out of debt without paying?

This could be in the form of an Individual Voluntary Arrangement (IVA), a Debt Management Plan (DMP), a Debt Relief Order (DRO), bankruptcy or a debt settlement offer. It's generally a good idea to seek proper advice before opting for any one debt solution to take care of the money you owe as they all work differently.

Is bankruptcy debt forgiven?

A bankruptcy discharge releases the debtor from personal liability for certain specified types of debts. In other words, the debtor is no longer legally required to pay any debts that are discharged.

Will bankruptcy clear all debt?

Going bankrupt means you aren't liable for most of your debts and you don't have to pay them. Bankruptcy doesn't cover all debts so it's important to make sure you know whether any of your debts won't be covered and put plans in place to deal with them.

Does bankruptcy hurt credit score?

As a result, filing bankruptcy can have a severely negative impact on your credit score. A Chapter 7 bankruptcy will remain on your credit reports and affect your credit scores for 10 years from the filing date; a Chapter 13 bankruptcy will affect your credit reports and scores for seven years.

How can I get out of debt without paying?

This could be in the form of an Individual Voluntary Arrangement (IVA), a Debt Management Plan (DMP), a Debt Relief Order (DRO), bankruptcy or a debt settlement offer. It's generally a good idea to seek proper advice before opting for any one debt solution to take care of the money you owe as they all work differently.

How can I get out of debt without filing bankruptcy?

Negotiate With Your Creditors If you have some income or you have assets you're willing to sell, you may be a lot better off negotiating with your creditors than filing for bankruptcy. Negotiation may buy you some time to get back on your feet, or your creditors may agree to settle your debts for less than you owe.

Understanding Foreclosure Deficiencies

When a house is sold at a foreclosure sale, the total amount owed by the homeowner on the mortgage to the lender often exceeds the foreclosure sale...

Filing Bankruptcy to Avoid A Deficiency Judgment

If your lender comes after you for the deficiency, and you later file for bankruptcy, bankruptcy will discharge (eliminate) the deficiency debt.How...

Filing Bankruptcy to Avoid Tax Liability For Forgiven Amount

Another reason to file bankruptcy before the foreclosure is because if your lender forecloses and cancels the deficiency debt (rather than seeks a...

Bankruptcy Cancels Other Mortgage Debt

If you have any other mortgage debt, such as a second mortgage or a HELOC, it may be wise to file bankruptcy before the foreclosure to wipe out you...

Bankruptcy Buys You Time in The Property by Delaying Foreclosure

If you file for bankruptcy before your home is sold at foreclosure, this can give you more time to live in the home.When you file bankruptcy, an "a...

You Can Save Money During The Foreclosure Delay

You can live in your home without making any mortgage payments during the bankruptcy -- at least until the lender obtains relief from the stay and...

Why do you file for bankruptcy before foreclosure?

If the only reason you are filing for bankruptcy is to avoid a mortgage deficiency balance, you could be jumping the gun by filing before your foreclosure sale because you may not be liable for a deficiency anyway.

What happens if you file for bankruptcy before your house is sold?

If you file for bankruptcy before your home is sold at foreclosure, the automatic stay will prevent the foreclosure case from moving forward. This can add to the time it takes the lender to sell your house, giving you more time to live in it.

What happens to a mortgage note after bankruptcy?

Bankruptcy eliminates most, but not all, types of debts. The balance due on your mortgage note (often called the deficiency) falls within the category of debts that bankruptcy will wipe out.

What happens when you file bankruptcy?

When you file for bankruptcy, an automatic stay goes into effect. This freezes all collection activities against you. A creditor cannot take money or property from you, and any lawsuits against you must pause, during the stay. Even trying to collect through phone calls or letters violates the stay.

What is the advantage of bankruptcy?

One big advantage of having the bankruptcy under your belt: The discharge of your other debts may mean that the bank will be more likely to approve your loan modification.

Can you pay dues to a condominium association before bankruptcy?

You are not liable for payment of dues to a homeowner's association or condomini um association if those dues are assessed before your bankruptcy petition is filed. However, you are liable for dues assessed on property in your name after you file for bankruptcy. If you file your bankruptcy after the foreclosure sale you avoid having ...

Can you keep your home if you file Chapter 13?

The benefit of filing a Chapter 13 in foreclosure is that you may be able to pay off your overdue mortgage payments over the course of your repayment plan. At the end of your plan, you will be current with your mortgage again.

How long does it take to get out of Chapter 7 bankruptcy?

But a Chapter 7 bankruptcy is removed after 10 years, so you face an extra three years of credit score damage.

How long does it take for a bankruptcy to be removed from credit report?

A foreclosure is removed from your credit report after 7 years. Chapter 13 bankruptcy is also removed after 7 years. But a Chapter 7 bankruptcy is removed ...

Does bankruptcy affect credit score?

Again, keep in mind that even if you had those exact credit scores, the actual score decrease you would see would likely be different because the sum total of the info that led to that score would likely be different. Note that the bankruptcy credit impact is the same, whether you file for Chapter 7 or Chapter 13.

Is foreclosure better than Chapter 7?

So at a first look, it seems like foreclosure is the better option, since it won’t decrease your score as much, and will be removed faster than a Chapter 7 filing. But that may not be the case, depending on your goals following the action.

Is a lower credit score bad for a mortgage?

Remember, a credit score isn’t the end-all-be-all of whether you get approved or not. Lenders review your credit profile and make decisions about you based on the information that your report contains. So even though a lower credit score usually means you’re a higher risk as a borrower, a mortgage lender may see things differently.

What happens when a debtor files for bankruptcy?

This includes foreclosure proceedings, which are stopped when the debtor files for bankruptcy. The court appoints a trustee who oversees bankruptcy proceedings, convenes a meeting with the creditors, and coordinates bankruptcy proceedings. Depending upon the type of bankruptcy, debts are either discharged or restructured.

How long does foreclosure stay on credit report?

A foreclosure will stay on the credit report for 7 years. While foreclosures stay on the credit report for a shorter duration, credit counselors believe that it has a worse impact on a person’s credit score than a bankruptcy that does not include the house. [2]

What is the difference between Chapter 7 and Chapter 11?

The main difference between Chapter 7 and Chapter 11 bankruptcy is that under a Chapter 7 bankruptcy filing, the debtor's assets are sold off to pay the lenders (creditors) whereas in Chapter 11, the debtor negotiates with creditors to alter the terms of the loan without having to liquidate (sell off) assets.

What is judicial foreclosure?

In a judicial foreclosure, the lender sues the defaulting borrower in state court in order to auction the property to recoup unpaid debts. In non-judicial foreclosures, the lender auctions the property without having to go to court. See Judicial vs. non-judicial foreclosures .

How much does it cost to file for bankruptcy?

Documentation such as a schedule of assets and liabilities, current income and expenses, copy of recent tax returns is required. There is also a filing fee of $250-350. Filing a bankruptcy petition automatically stays (stops) most collection actions against the debtor or the debtor's property. This includes foreclosure proceedings, which are stopped when the debtor files for bankruptcy. The court appoints a trustee who oversees bankruptcy proceedings, convenes a meeting with the creditors, and coordinates bankruptcy proceedings. Depending upon the type of bankruptcy, debts are either discharged or restructured. Creditors have to agree to the repayment plan or debt discharge plan and can present their objections or point of view to the court.

What is Chapter 7 bankruptcy?

There are different kinds of bankruptcy filings — a Chapter 7 bankruptcy covers all unsecured debt, meaning that individuals can emerge from it with no debts except a mortgage, car payments, student loans and unpaid child support.

How long does it take to pay off a mortgage after bankruptcy?

If you want to keep your home, Chapter 13 bankruptcy may be the best option, as it allows you to pay off at least part of the mortgage within 3-5 years. However, people must pass a means test to qualify for this.

What happens if you file for bankruptcy before foreclosure?

If you file for bankruptcy before foreclosure, your mortgage debt will be discharged. (Although the lien will remain, which means that if you default on payments, the lender can still foreclose.) Because there is no longer any mortgage debt, after the foreclosure sale there will be no deficiency and no tax liability for any cancelled deficiency ...

How long does it take to get a stay in bankruptcy?

While your bankruptcy winds its way through the court system, which could take three or four months, you have the opportunity to build up your savings by living in your home without paying any mortgage or rent.

Why do lenders forego foreclosure rights?

Because of the expense (and because borrowers who lose their homes in foreclosure often don't have much in the way of income or assets), lenders frequently forego this right. (To find out what the law is in your state, see the Mortgage Deficiency Laws topic page and the article on Anti-Deficiency Laws .)

What happens if a lender doesn't pursue you?

If your lender doesn't pursue you for the deficiency and instead cancels the debt, in the eyes of the IRS you have just received taxable income. As far as the IRS is concerned, you once owed a certain amount of money (say, $20,000); you now no longer owe the $20,000; therefore, you've received a windfall of $20,000. You will have to pay income tax on that forgiven debt unless you qualify for one of two exceptions: the Mortgage Debt Relief Act of 2007 exception or the insolvency exception.

What is the difference between the amount owed on a mortgage and the foreclosure sale price?

The difference between the amount owed on the mortgage and the foreclosure sale price is called the "deficiency." (Some states cap the amount of the deficiency to the difference between the property's fair market value and the foreclosure sale price.)

What is the maximum amount of mortgage debt that can be forgiven?

The maximum amount of forgiven debt that can be claimed under this exception is $2 million (or $1 million if you're married but you file separately). This exclusion only applies to loans taken out during the calendar years of 2007 through 2013. (Congress is currently considering a bill which would extend that through 2015.) For more details and updates on this Act, see Nolo's article Canceled Mortgage Debt: What Happens at Tax Time?

How to qualify for insolvency exception?

To qualify for the insolvency exception, you must show the IRS that you were insolvent when the debt was cancelled. You were insolvent if the total of all of your liabilities was greater than the total of all of your assets

Why are foreclosures and bankruptcy linked?

Bankruptcy and foreclosure are often linked because bankruptcy is somewhat famous as a foreclosure stopper.

What happens if you file bankruptcy behind on your mortgage?

If you enter bankruptcy behind on the mortgage, there’s a good chance that your lender will file a motion for relief from stay and will be given the right to continue with the foreclosure. However, even lenders who have successfully lifted the protection of the automatic stay are not always motivated to immediately resume with foreclosure. In fact, one of the biggest problems that consumers in bankruptcy are facing right now is lenders who are unwilling to foreclose on collateral.

Why do people file for Chapter 13?

Many families simply do not have the means to comply. In order to stop foreclosure, they file for Chapter 13 because it allows for them to pay back the past-due mortgage balance over the life of the Chapter 13 plan. The amounts that are past due are broken up into small increments and added to the normal monthly mortgage payment, making the process of getting caught up far more manageable.

What happens if you file for bankruptcy 7?

When you file bankruptcy (7 or 13), a court-ordered injunction, known as the automatic stay, prevents the bank from foreclosing on your home. This is true even if you file bankruptcy the day before the foreclosure sale is set to take place. That’s the good news. Now, on to the not-so-good news.

How long can a bank foreclose on a Chapter 13?

If you can afford payments in a timely fashion, the bank can’t foreclose for the entire three- to five-year period or any other time in the future. By handling your past-due payments through a Chapter 13 plan, you have the opportunity to permanently stop the foreclosure.

How long does Chapter 13 bankruptcy last?

Chapter 13 Bankruptcy and Foreclosure: How it Works. Unlike its faster cousin Chapter 7, Chapter 13 bankruptcy lasts for a period of between three to five years. During this time, you pay back a percentage of the debts you owe to your unsecured creditors.

What to do if your attorney is pressuring you into filing for bankruptcy?

If you feel that your attorney is pressuring you into filing for bankruptcy, politely wait for the consultation to end and seek out a different firm.

How does bankruptcy affect credit?

Bankruptcy usually affects credit reports in a really bad way. It will be a big negative mark on a persons credit for at least 7-10 years. For most it’s 10 years. Everything is tied to credit especially when borrowing. Your borrowing power will be affected for some time, however it won’t be affected forever. You’ll still be able to get credit cards and slowly work yourself to good standing again even after you file. It will feel like starting from scratch. Your credit limit might be $1000 and interest rate 30% because you are considered high risk.

Why do we have to go bankrupt?

We have to go bankrupt because of mounting credit card bills (business stop producing income for 6 months) and to discharge note with previous owner. Also bankruptcy chapter 7 should strip previous business owner lien on our house. Goal with business to remove remaining Note debt and lien on our house.

How much is the WFHL loan compared to the WFB loan?

The WFHL loan is the smaller loan ~$45K while the WFB loan is ~$95K.

How long does bankruptcy stay on credit report?

Some assets you may be asked to sell. Bankruptcy will usually stay on an individuals credit report for 7-10 long years, and it will haunt them the whole time. Bankruptcy makes it very difficult to qualify for loans or purchases because of the derogatory marks on their credit.

What is the difference between Chapter 7 and Chapter 13?

Chapter 7 is the “wipe out” and Chapter 13 is the “work out”. Bankruptcy is a federal court action designed to help individuals repay their debts or eliminate their debts depending on their circumstances. Chapter 13 bankruptcies are designed to reorganize debts in an effort to repay all debt. Chapter 7 bankruptcies are geared more towards liquidation of assets. Both Chapter 7 and Chapter 13 immediately stop the foreclosure process and any creditors from taking further action against an individual.

What happens when you file Chapter 7 bankruptcy?

When someone files a Chapter 7 bankruptcy, all assets are frozen. The attorney will create what is called an automatic stay. Everything “Stays” put. The homeowners can’t buy anything, they can’t sell anything, and they can’t even give away anything. If they try to sell their home, they couldn’t. If they try to give away savings, they can’t. Any unsecured debt like credit cards, unsecured loans, etc. are eliminated or wiped out. They do not exist anymore. Then the trustee or attorney who represents the court and the creditors will look at all the assets (house, car, furniture, equipment) anything of value and decide what must be liquidated to pay some of the debt that was wiped out.

How long does it take for a house to go back up for auction?

If the person cannot pay the required amount set by the judge, then in 3 months the home will go back up for auction. Believe it or not, this happens all the time. So if one files bankruptcy, follow it or give the person your business card as a 2 nd alternative if for some reason they fail to make their payments again.

Foreclosure vs. Bankruptcy - Pros and Cons

Impact on Credit History - Which Is Worse?

• A bankruptcy stays on the individual's credit reportfor 10 years. A foreclosure will stay on the credit report for 7 years. While foreclosures stay on the credit report for a shorter duration, credit counselors believe that it has a worse impact on a person’s credit score than a bankruptcy that does not include the house.

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