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DebtFinancial PlaningPropertySavings

Foreclosure, Bankruptcy or Something Else?


There’s been a lot of dialogue, discussion and, yes, misinformation about the options available to people facing foreclosure. Before ANYONE does ANYTHING about their situation they should really sit down and learn about their options. What most people don’t realize is there are certain laws in place to protect people in foreclosure and that that there are many paths that you can go down, not all of which have a bad outcome.

First, let’s talk about the foreclosure process. The lender needs at least 120 days before they can technically take your property through a foreclosure sale. Even IF they followed the rules, i.e. served you with Notice of Defaults, publicly posted impending foreclosure sale, etc., you have options before the home is actually sold at auction. In fact, NO lender wants your home. The reason, they have too many, they’re not in the business of owning homes and it’s too expensive to go through the process.

But, let’s say you are in the unfortunate situation of being foreclosed upon AND it’s up for sale. You can “stall” the proceedings by simply not moving. Once you are foreclosed out, you know are technically a tenant that now needs court approval to be evicted. So, in reality, you may actually have almost a year once foreclosure starts to stay in your home.

Think about that situation before you make a rash decision to dash out of the home.

Now, from a credit perspective, a bankruptcy will do the most harm, with foreclosure being the second worse. Interestingly, while you are late on your mortgage, some credit bureaus seem to be tougher than others. For instance, American Express is on you like a hawk. They will immediately reduce your credit amount and may even suspend your account altogether. Whereas, others may just leave you alone for awhile. It has a lot to do with what credit bureaus are being reported to.

If you NEVER plan to buy a house or car on credit again, who cares about credit? Think carefully about this statement. A bankruptcy takes about seven years to clear out of your credit report. A foreclosure can be as little as three years. But, in some cases of consumer credit, i.e. if you are buying a car or financing a stereo, the real estate related credit history is not taken into much consideration. BUT, if you want to get a loan to buy a home sometime in the future (depending on how far into the future), consider foreclosure over bankruptcy.

On the other hand, before you even get that far, I would strongly consider several other options. Option number one are the obvious ones: sell or re-finance. Another option is to rent it out … technically, if the loan is “owner occupied”, you have to live in it and not rent it out. But, come on, do you think the bank wants to own this property? Not on your life!

Your next best option is to do negotiate a short sale. This has the least impact on your credit report, maybe 50 to 60 points. IF that is not possible, then consider what’s called a “deed in lieu of foreclosure.” What this means is that you are asking the bank to just take the property. You relinquish title of the property in return for no foreclosure. Why? Because the foreclosure is the next worse credit hit scenario.

None of these solutions create any type of win for anybody. In fact, there is a flaw in Barack Obama’s mortgage crisis fix. And, the banks only exacerbate the problem. Why would they NOT want to work with existing homeowners who might pay a little less on their mortgage EVEN THOUGH they may have lost their job? They would prefer to sell it for significantly less through a short sale then to keep a person in their home?

And, what about the person who bought as a rental property? For example, a person who has an outstanding loan of $325,000, a bank was willing to short sale the property for $120,000, but not let the owner reduce his monthly payment from $2,500 down to $1,500. Think about that for a minute. $1,500 / month over 30 years is $540,000. Yet, their willing to take $120,000 now? How idiotic is that?

There are plenty of problems with this mortgage crisis and its fixes. But one thing is certain. It seems that lenders and the almighty government is willing to bite off its nose to spite its faceBankruptcy, Foreclosure, Short-Sale

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