Bankruptcy

Foreclosure or Bankruptcy ? Which is the lesser of two evils

By Attorney Goldstein

            In the past, ?Foreclosure? and ?Bankruptcy? were considered two of society?s dirty words.  Today these terms are viewed by many as relief from Financial Black holes that can not otherwise be escaped.  In the current economy, inundated with bad mortgages, many of which stem from predatory lending practices, coupled with credit card debt spinning out of control, bankruptcy and the loss of ones home have become common place.  For many homeowners, a decision needs to be made as to which of these terms is the lesser of two evils.

            For homeowners whose debt has spun out of control, and whose income does not cover expenses, foreclosure and or bankruptcy are options that may be inevitable.  However, which of these terms truly is the lesser of two evils? 

            Should a homeowner file for bankruptcy, they may be able to eliminate all of their credit card debt, medical bills, court ordered judgments and even electric and gas bills.  With the assistance of a bankruptcy discharge, they may then be able to stay current on their mortgage.  However, many people are even more concerned about their credit score.  They may ask, ?Will we be able to obtain future financing??

            Should a homeowner rather, opt for foreclosure, they will certainly loose their home, but do they really want to keep it in this market where the house may be worth far less then what is owed.   If a homeowner opts to walk away from their house, they may own other investment property, and be able to live in a multi-family house, or they may simply want to rent and not deal with all the hassles of homeownership.  ?If something breaks, let someone else fix it, repair it, deal with this problem?. 

           Neither option is an easy choice.  A bankruptcy will remain on your credit for 10 years, while a foreclosure will only remain for 8 years, but many credit counselors report it has twice the negative impact on your credit score compared with a bankruptcy. It will be extremely difficult to obtain a new mortgage for many years after you have lost a home to foreclosure.  Many homeowners may see foreclosure as a better option then simply obtaining the financial relief that the Bankruptcy Laws provide.  What many do not realize is that a foreclosure may be even a darker mark on their credit then a bankruptcy.  As a result, it may be even more difficult with a foreclosure on their record to obtain subsequent housing.  Many mortgage lenders look at a foreclosure more seriously than they will a bankruptcy.  As a result, a former homeowner may not qualify to rent the apartment or house they want, even though they may be able to afford it now that the mortgage obligation is gone. 

            One of the key factors to keep in mind is that when you file and receive a discharge of your debt in a bankruptcy, even if your credit score is lower, you are still a better candidate to receive future financing and in very short order.  The reason is simple.  After your bankruptcy discharge, you do not owe anything to anybody.  Additionally, creditors realize that you can not file for a new bankruptcy for another eight (8) years, and as such can not walk away from any new debt that you may incur as a result of credit extended to you by a new creditor, be it landlord, credit card, or other financing option.

            Now it should be pointed out that in many cases, you may be so far behind that a foreclosure is going to happen no matte what.  If this is the case, it may be in your interest to file for bankruptcy right before the order.  The reason is that if the bank sells the property for less then what is owed, the difference (commonly referred to as the deficiency) will be discharged.  As a result, the bank will often sit on a foreclosure order for some time before they act upon it, so as to not loose more money.  In the meantime, a homeowner can possibly short sell their house and move on with their life.

            Based upon the foregoing, if you are facing a financial crisis that may end in either foreclosure or bankruptcy, consult an attorney to explore what your best option may be. The right decision may save you years of restricted credit in the future.

Full post as published by Bankruptcy Articles & Blog on April 10, 2009 (boomark / email).