Each month, SmartHippo puts out a personal finance newsletter with an ‘Ask an Expert’ column. (You can subscribe here) This month’s question is all about what to do if you’re in a bad situation and are deciding between foreclosure or bankruptcy. This month’s expert is Adrian Dayton, an attorney and PR Consultant in Buffalo, NY.
Here it is:
So here is the situation- you’ve lost your job and you are flat broke. No money left in savings, checking, or in your retirement accounts. You own a home, but you are more than 90 days late on your payments. Is it better to have the bank foreclose on the home- or should you file for bankruptcy?
The answer as always is- it depends.
The first big question to ask before deciding on foreclosure or bankruptcy (both pretty gloomy options)is: what other choices are there? Each of these options are incredibly expensive, and they should only be looked at as a last resort. You don’t want either of these, and either do the banks. Contact your lender to find out if they offer loan modification, forbearance (where they hold off on requiring payments while you find a new job), or a re-negotiation of loans in default. Generally the customer service individual you talk to on the other end of the phone won’t be able to offer these options, so you may need to work your way up the chain of command. Ask to speak with someone that can help provide alternatives to foreclosure. In addition, find an accredited counseling agency to help you negotiate; this is an inexpensive way to find a skilled advocate that knows how to speak the bank’s language. If there is any possible option that allows you to stay in the home- take it.
Another option is what is called a “short sale.” In this scenario the bank will voluntarily take the house back- and then sell it to the highest bidder. You are then responsible for paying the difference, but banks may not even take action to get that back- you no longer have any major assets they could go after. The bank may not be willing to do a short sale if you are too far upside-down in your home.
What if you have to choose between a bankruptcy and foreclosure? A foreclosure will remain on your credit report for 7 years, while a bankruptcy will be there for only 10 years. Either way, you have taken an axe to your credit rating, and especially in the current economic climate- a bank won’t lend you money for a car or home for some time. The one benefit of a Chapter 7 bankruptcy is that all of your debts are forgiven, as opposed to foreclosure where you lose the home, but are still responsible to pay your debts. The whole purpose of Chapter 7 is to wipe the slate clean, and give you a chance to start over. You should note you will be starting from zero with bankruptcy- meaning zero credit. With a foreclosure you at least salvage some credit, allowing use of credit cards, and possible other loan options. Freedom to continue using some credit is a definite advantage foreclosure has over bankruptcy. It all depends on your personal situation.
For those who have just hit a streak of bad luck- you’re not alone. Remember, it’s easy to ruin your credit rating, and while it’s hard to build it back up- it can be done. But rebuilding your wounded credit rating is a topic for another article.
Adrian Dayton is an Attorney and PR Consultant in Buffalo, NY He can be reached at atdayton@gmail.com or on twitter @adriandayton. Adrian is currently awaiting the release of his first book The Year of 12 Virtues: Old World Virtues to Save the Modern World. You can learn more about it at adriandayton.blogspot.com
