Bankruptcy vs. Foreclosure

Some parts of the United States are seeing a rebound from the housing crisis. However, other areas are only just seeing the beginning which is leaving cash-swapped consumers with some serious decisions. One of the decisions that these consumers face is whether to allow their house to be foreclosed on or instead filing for bankruptcy protection.

When making this decision, the consumer must first decide if they would like to keep the house. This is a particularly emotional issue when a family is involved. When children are in the picture, families are often willing to make sacrifices to prevent uprooting them. If this is your situation, or you have other reasons for wanting to keep the house, then foreclosure is obviously not an option.

If you are looking at bankruptcy protection in order to allow your family to stay in the house, then it is important to look at the post-bankruptcy financial picture. You will need to sit down with all of your bills and determine what will be discharged in the bankruptcy and what will remain afterwards. If the majority of your debt is tied up in student loans or to the IRS then bankruptcy is not going to alleviate much of your financial burden. On the other hand, if the majority of your debt is unsecured credit, then the bankruptcy will likely free up a substantial amount of cash. This extra money will allow you a better opportunity to meet your monthly mortgage obligation post-bankruptcy.

For consumers who decide that foreclosure is the best option, there are a few things that you must be aware of prior to the foreclosure process actually begins. Depending on the housing market in your area, you may try to arrange for a short sale. A short sale happens when an offer for a house is made that is less than the mortgage note(s) on the house but the lender agrees to accept this reduced amount as payment in full. A short sale will have a negative impact on your credit but not to the extent that a foreclosure or bankruptcy will. One benefit of a short sale over a foreclosure is that the bank considers the loan repaid in full and you will not be held liable for the difference.

Even though many banks are being jammed with foreclosures, several still refuse to accept short sales so this is not an option for everyone. At this point, there are a couple of foreclosure options to consider. Some banks will try to talk consumers into relinquishing their house deed in lieu of foreclosure. This is a good idea if the bank agrees to accept the deed in lieu without recourse. In other words, the bank accepts the deed as payment in full for the note, regardless of what the property brings at auction. If the bank refuses to accept a deed in lieu without recourse then there is no benefit to you to offer the deed and you might as well make the bank work for the foreclosure. Perhaps they’ll be incentivized to accept it without recourse when they realize the additional work that they will now be going through.

If your mortgage company will not accept a short sale or a deed in lieu of foreclosure without recourse, then they will have to go through the entire foreclosure proceedings. This usually does not occur until your mortgage is six months (or more in some cases) delinquent. A foreclosure is a serious hit to your credit report, but not to the extent that a bankruptcy is. In addition, the mortgage companies can sue you for the difference between the value of the mortgage and the amount that the property brings at auction plus additional fees in some cases.

Unfortunately the decision between filing for bankruptcy or having your house foreclosed on is one that is being faced by record numbers of Americans. Some consumers are holding on to the hope that the federal government will step in with a plan that will allow them to keep their house without having to reaffirm after filing for bankruptcy protection. If the government does step in, it will likely be too late for tens of thousands of American families.