Foreclosure vs. Bankruptcy: Which Is Worse?

Foreclosure vs. Bankruptcy: Which Is Worse?
Information in this article does not constitute legal advice, it is for informational purposes only, and may not constitute the most up-to-date information. Readers should contact their attorney for advice on any particular legal matter.

When you find yourself in a situation where you can no longer afford your mortgage payments, it can be overwhelming. You may be asking yourself, “What do I do now?” or “What will happen to my house?” It's common to wonder if filing for bankruptcy or allowing foreclosure to happen is the better option. However, the answer to this question is not a one-size-fits-all solution. It's important to take time to understand each option and determine which one is best for your situation. In this article, we will discuss the benefits and challenges of each option, and explore other alternatives available to you.

What is Foreclosure?

Have you ever heard of foreclosure? It's a process where the bank or lending company that gave you a loan for your home takes possession of the property when you fail to make your mortgage payments. That's why it's important to make your payments on time to avoid the risk of losing your home.

Did you know that most states have a grace period of around 120 days? This means that if you miss your payments for more than 120 days, the mortgage company can file for foreclosure. However, there are other factors that can lead to foreclosure or make it an option, aside from the inability to pay your mortgage.

Foreclosure can be a challenging experience, but there are ways to prevent it from happening. By keeping up with your mortgage payments and seeking help from your lender or a housing counselor if you're struggling to make payments, you can avoid the risk of losing your home.

Negative Equity

Did you know that negative equity is a major reason for foreclosures? It happens when the value of a house is less than what the homeowner owes on the property. This leaves the homeowner with limited options. They can’t sell the house because they still owe money on the loan, and refinancing may not be enough to cover the difference. Essentially, they’re stuck with the house until they pay it off, sell it for a loss, or face foreclosure. It’s a tough situation to be in, but there are ways to avoid it.

Rising Property Taxes

It's unfortunate that there is an annual tax assessment that determines the property value of your home. If the assessment raises the value, then your mortgage payment will also increase. Sometimes, the jump in assessment can be so drastic that the new payment becomes unaffordable. In this case, the home may no longer be worth the original purchase price.

Considering these factors, there are many reasons why foreclosure may occur. But what's the better option: allowing the foreclosure to happen or filing for bankruptcy to prevent it? Before answering this question, it's essential to fully understand what bankruptcy is.

What is Bankruptcy?

Bankruptcy is a legal process that can help individuals who are struggling to pay off their debts. When someone files for bankruptcy, they seek the help of the court to relieve them of their debts. There are two types of bankruptcy available for individuals: Chapter 7 and Chapter 13 bankruptcy.

Chapter 7 bankruptcy is also known as "liquidation" bankruptcy. It involves selling off the debtor's assets to pay off their debts. However, some assets may be exempt from liquidation, such as a primary residence or a car that is necessary for work. Chapter 7 bankruptcy is usually a quicker process than Chapter 13, but it may not be the best option for everyone.

Chapter 13 bankruptcy is also known as "reorganization" bankruptcy. It involves creating a repayment plan that allows the debtor to pay off their debts over a period of three to five years. This type of bankruptcy is usually a better option for those who have a steady income but are struggling to keep up with their debts.

It's important to note that bankruptcy can have long-lasting effects on an individual's credit score and financial future. However, it can also provide a fresh start and relief from overwhelming debt. It's crucial to consult with a bankruptcy attorney to determine if bankruptcy is the right option for your specific situation.

Chapter 7

If you're struggling with debt, you may have heard of Chapter 7 bankruptcy. This type of bankruptcy is sometimes called liquidation bankruptcy because it involves selling off assets to pay back debts. But what happens to your house in a Chapter 7 bankruptcy?

There are actually some cases where your house may not be liquidated during a Chapter 7 bankruptcy. In these situations, you could emerge from bankruptcy with your house intact and your debt wiped out. One scenario where this might happen is if you owe more on your mortgage than your house is worth. Another possibility is if your home is worth less than the exemption rate in your state.

It's important to note that not everyone is eligible for Chapter 7 bankruptcy. You must meet certain income requirements to qualify. If you make more than the maximum amount allowed, you won't be able to apply for Chapter 7 bankruptcy.

Chapter 13

If you're struggling with debt, filing for bankruptcy may be an option to consider. One type of bankruptcy is Chapter 13, where your debts are put into a court-monitored payment plan. This plan includes any outstanding mortgage payments you may have, making it possible for you to keep your home. Once the payment plan is completed, any eligible remaining debts will be discharged.

Now, the question is, which option is better for you? The answer depends on your specific situation. If keeping your home is a priority and you can commit to the payment plan, Chapter 13 may be the better choice. It's important to weigh the benefits and challenges of both options before making a decision.

What Are The Consequences?

Choosing between foreclosure and bankruptcy can be a tough decision, as both options come with consequences that can affect your credit score for years to come. Foreclosure can stay on your credit report for up to 7 years, while bankruptcy can stay on your report from 7-10 years. Additionally, foreclosure can lower your credit score by anywhere between 85-160 points, while bankruptcy can lower it by 130-240 points (and missed payments can make it even worse).

While it may seem like foreclosure is the better option, that's not always the case. Some creditors actually view bankruptcy more favorably than foreclosure. According to FindLaw, most mortgage creditors will not consider giving you a loan for at least two years after a foreclosure, while you may be able to qualify for a mortgage just two years after filing for bankruptcy.

Ultimately, both foreclosure and bankruptcy come with negative consequences, so it's important to consider which ones will impact you the most.

Which is Best: Foreclosure vs. Bankruptcy?

It's important to note that the best solution for your situation will depend on various factors. For instance, if you owe more on your house than it's worth and don't qualify for Chapter 7 bankruptcy (which would require you to keep making payments on the house), it may be best to let the foreclosure process happen naturally. However, if you're struggling with overwhelming debt and meet the requirements for Chapter 7 bankruptcy, it may be worth considering. With this option, you'll either keep your house or have it liquidated, and you won't owe anything on it. Alternatively, if you need assistance catching up on payments, filing for Chapter 13 bankruptcy could be the way to go. This will allow you to pay off your mortgage arrears without the threat of foreclosure.

Remember, the decision to file for bankruptcy is a big one and should be made after careful consideration of your financial situation. Each option has its benefits and challenges, so it's important to weigh them carefully before making a decision. By taking the time to explore your options and seek professional advice, you can make an informed decision that will help you get back on track financially.

Conclusion

It can be challenging to determine the best course of action for your unique situation. Each circumstance is different, and there isn't a one-size-fits-all solution. That's why it's crucial to assess your specific needs and evaluate which path would be most advantageous for you. However, if you're struggling to determine the best option, don't worry. Our team of experts is available to guide you through the decision-making process and help you choose the best course of action. Give us a call today, and we'll be happy to assist you.

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