Many folks today face the unfortunate predicament of having to decide whether to let their mortgage company foreclose on their home, or whether to declare bankruptcy to try and save it. The average homeowner may not know whether bankruptcy or foreclosure is more detrimental to their future. This article may help some with making a more informed decision but as always one should consult an attorney prior to making such an important decision because one's particular facts may require a drastically different choice over one another.
The credit bureaus do not make the decision any easier because they do not publicize their formulas for determining credit scores. If they did, then perhaps by analyzing the mathematical algorithms, homeowners could determine whether bankruptcy or foreclosure had the longer term effect, and choose the one with the least effect. What we do know from the credit bureaus is they report foreclosures for 7 years and bankruptcies for 10 generally speaking. Does this then mean one should always allow their home to be foreclosed as opposed to declaring bankruptcy as this action will result in a shorter negative reporting period on credit? Well, if that were the case then why do lenders consider individuals for mortgages 2 years after discharge of their bankruptcy? This latter fact would seem to indicate lenders view bankruptcy as less detrimental to one's credit.
Many people also do not know that if a lender forecloses on your home, not only is that lender entitled to foreclose and take the home, but they are also legally able to add attorneys fees, late fees and interest and pursue what is called a deficiency judgment against the foreclosed owner (the difference between what the house sells for at foreclosure and the sum of the mortgage, attorneys fees, late fees and interest). This difference can often be thousands if not hundreds of thousands. Then, per Massachusetts Law the lender can sit on that judgment for up to 20 years prior to having to enforce it. This means the Lender has a span of twenty years to decide when to attach foreclosed owners wages, repossess their car for payment, attach their future bank accounts as well as use any other collection methods the Lender wishes to collect on their deficiency judgment.
For a foreclosed homeowner facing such a situation there is only one solution to eliminating the 20 year uncertainty, and that is bankruptcy. Now whether it is a chapter 7, 13 or 11 will be determined by the foreclosed owner's particular circumstances. Nevertheless, the homeowner caught in this situation will have both a foreclosure and a bankruptcy on their credit and depending on how quickly they file bankruptcy, the combination cannot be good for their future credit score reporting.
If the distressed homeowner had consulted an attorney earlier on in their financial predicament, then perhaps a short sale could have been discussed where the attorney could have worked to get the Lender to forgive the deficiency, the homeowner letting go of the home and the lender not pursuing a deficiency judgment. In the alternative and depending on the distressed homeowner's financial situation, maybe a chapter 13 bankruptcy could have been feasible in catching up on arrearages and saving the home from foreclosure for altogether. Either way, if the distressed homeowner had consulted legal advice earlier on in the process, it is clear the homeowner could have been informed of less credit damaging scenarios than foreclosure or forced bankruptcy (to avoid 20 years of collections).
It is this author's opinion, distressed homeowners should consult legal advice as soon as possible to determine their options. Waiting or burying one's head and letting the chips fall where they may will often lead to more financial and credit damage than may have been necessary.
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