Advice on Bankruptcy & Foreclosure

Foreclosure and bankruptcy can be two of the most formidable problems a homeowner can face. If you’re close to either one of these possibilities, it probably means you’re in serious financial difficulty. The concepts are daunting, but understanding the process of both concepts–and knowing to whom you should turn in this crisis–could make all the difference in emerging from both without losing everything.

Talk to the Bank

The Federal Trade Commission recommends talking to your lender as much as possible when you fall behind on your mortgage payments. Your lender will likely ask questions such as why you fell behind on your payments and whether your problem is short term or long term. Keep notes from the conversation, follow up on any requests your lender makes and meet any deadlines your lender gives you. The more you talk to your lender, the more time you may have to save your home or delay the process of either foreclosure or bankruptcy.

Know Your Options

The FTC outlines several options that don’t involve traditional foreclosure or bankruptcy in order to keep your home. You can negotiate a repayment plan with your lender. You can file for a forbearance, which suspends mortgage payments for a time while you save the money to catch up. You can apply for loan modification, either through your lender or through government programs designed for mortgage relief. There are also ways to avoid both foreclosure and bankruptcy, but they involve giving up the property through a traditional sale, a short sale–where you sell and your lender forgives the shortfall–or a deed in lieu of foreclosure, where you sign the home over to the bank.

A Serious Choice

If you have fallen behind at least 90 days on your home payments, you have a decision to make, which may involve either declaring bankruptcy or having the bank foreclose on your home. At the 90-day point, your bank can begin the foreclosure process. Neither choice is a great option, according to John W. Schoen, a senior producer for MSNBC. Of the two, bankruptcy is likely to stay on your credit longer, up to 10 years. Foreclosure stays on your credit report for seven years. Schoen quotes a Dallas-area financial counselor as saying that banks look at foreclosure with greater wariness than bankruptcy when determining loan eligibility after the fact. Most experts advise avoiding either scenario, if possible.

If You File, When To File

Once the foreclosure process begins, there isn’t much you can do to stop it, aside from making the loan right. But one way to delay it is to file bankruptcy, because it comes with an automatic stay. Once you file for bankruptcy, your creditors cannot continue to pursue actions against you to reclaim your debt until your case is resolved. This action probably won’t save your home if you file for a Chapter 7 bankruptcy, which liquidates all non-exempt assets, but it can delay the foreclosure process for up to three months. But you must file before your home is sold in a foreclosure auction, or the bankruptcy will do you no good.