When faced with the reality that you can no longer afford your mortgage payments, many things may run through your head. Questions like, “What is my next step,” and “What will happen to my house,” are normal things to wonder about in situations like this. However, one of the most frequent questions we hear is “is it better to file for bankruptcy or just allow the foreclosure to happen?” Unfortunately, there isn’t an answer that is true across all circumstances. Because of this, it’s important that you take time to really understand what each option offers and which would best benefit your circumstance. This article will go over each option, which is best for each situation, and what other options are available to you.
What is Foreclosure?
Foreclosure is a process in which the mortgage company that gave you the loan for your home takes possession of the residence after a lack of repayment. So, if you miss making your monthly mortgage payments, there is a potential that the mortgage company will take possession of your home.
Most states have a grace period — the most common grace period is 120 days. If you go more than 120 days without making a payment, the mortgage company will be able to file for foreclosure. While the core of foreclosure comes from being unable to repay your mortgage, there are other things that can force a foreclosure or make it an option.
One major reason that most foreclosures take place is because of negative equity. Negative equity is when a house is worth less than what the homeowner owes on the property. Having a house with negative equity eliminates the homeowner’s options when it comes to the home. They cannot sell the house to get rid of it, because they will still owe money on the loan. They cannot refinance enough to cover the difference (usually), so it would serve no purpose. This means that they are stuck with the house until they either pay it off, sell it for a loss, or lose it in a foreclosure.
Rising Property Taxes
Unfortunately, there is an annual tax assessment that determines the property value of your home. If the tax assessment raises the value, then the mortgage payment also raises. Sometimes, the jump in assessment can be so drastic that the new payment is unattainable. Again, in this circumstance, the home may no longer be as valuable as the original purchase price.
With these two other things considered, there are many reasons why foreclosure may occur. But what is better: allowing the foreclosure to happen, or filing for bankruptcy in an effort to stop the foreclosure? Before answering this question, we need to fully understand what bankruptcy is.
What is Bankruptcy?
Bankruptcy is a legal proceeding in which an individual, who is unable to stay on top of paying off their debts, seeks the debt-relief assistance of the court. There are two different forms of bankruptcy that are available for individuals — Chapter 7 and Chapter 13 bankruptcy.
Chapter 7 bankruptcy is often called liquidation bankruptcy, namely because the individual’s debts are attempted to be paid back through the liquidating (or selling) of their assets. When specifically thinking about a house, there are a few ways in which Chapter 7 bankruptcy can be beneficial. For instance, there are some cases where your house will not be liquidated during a Chapter 7 bankruptcy.
If your house is not liquidated, there is a chance that you get out of your bankruptcy case with your house intact and your payments gone. This could be the case when the amount you owe is more than what the house is worth. It can also happen if your home is under the exemption rate which varies by state. The catch with Chapter 7 is that you do have to qualify for it. If you make more than the maximum amount allowed, you will not be eligible to apply for a Chapter 7 bankruptcy.
With a Chapter 13 bankruptcy, your owed debts are put into an extended payment plan which the court oversees. If you still owe money on your home, this debt will be rolled into the payment plan as well. If the issue you are having is simply keeping up with your payments, then there is a chance that you will be able to keep your home by staying on top of this court-ordered payment plan. After the payment plan is complete, any other debts that are eligible will be discharged.
So which is the better option? Well, it depends. Let’s take a closer look at which option is better for each situation.
What Are The Consequences?
There are consequences to both routes. A foreclosure will stay on your credit report for up to 7 years, while bankruptcy can stay on your report from 7-10 years. Also, foreclosure can knock your credit score down anywhere between 85-160 points, while bankruptcy can knock your score down between 130-240 points (missed payments can knock it down further). While this may seem as though foreclosure is the better option, that isn’t always the case. Some creditors actually consider bankruptcy more favorably than foreclosure. So while both may have negative consequences, consider which consequences affect you more.
Which is Best: Foreclosure vs. Bankruptcy?
Again, your specific situation will determine which solution is best. If you are underwater on your house, but don’t have a lot of other debt and don’t qualify for the Chapter 7 bankruptcy (meaning you would simply have to continue making payments on the house) consider allowing the foreclosure to happen naturally. If you are completely overwhelmed by debt and qualify for Chapter 7, consider filing! In this instance, you will either keep your house or it will be liquidated and you will no longer owe anything on it. And finally, if you simply need help catching up on payments, consider filing for a Chapter 13 bankruptcy. This will allow you to catch up on your mortgage arrears without the threat of foreclosure.
Ultimately, there isn’t one answer that works for every circumstance. Take stock of your situation and determine which path would be most beneficial for you. And if you would like help figuring out which option is best, give Ascend a call today. We would love to talk you through your options.