Which is worse: Foreclosure or Bankruptcy?

[Moe Bedard]

The question of the day: Is it better to lose your house to foreclosure of file for bankruptcy protection?

A foreclosure will remain on your credit report for 7 years, while a bankruptcy remains for 10 years. If you ever plan on getting any kind of loan and especially a mortgage, lenders are going look at a foreclosure more seriously than they will a bankruptcy that doesn’t include the house.

Even in the good ole subprime loan days you could obtain a loan 1 day out of bankruptcy. But a foreclosure was ALWAYS a black cloud and lenders usually wanted 3-4 years time to pass before considering a borrower for a loan.

Now, you are definitely looking at least 4 years from discharge to obtain a decent mortgage.

The main goal in trying to perform a loan workout with your lender is to avoid the catastrophic credit implications of a foreclosure or bankruptcy. But sometimes, even the best of efforts to save your home and your credit fail.

Hope for the best but “prepare” for the worst. There are no guarantees.

There are different ways to file for bankruptcy, and not all of your debts have to be included. So even if faced with bankruptcy, you’ll need advice from someone - either a good credit counselor or a bankruptcy attorney - who can walk you through the choices you’ll face.



While the bankruptcy process in the U.S. is governed by federal laws and handled by a system of federal bankruptcy courts, state laws regarding consumer debts and the disposition of property also come into play. There are also different types of bankruptcy filings. No matter which course you take, the filing stays on your credit record for 10 years. That makes it very difficult to get any type of loan during that period; the loan will be more expensive if you can get one.


The two most common forms of personal bankruptcy are called Chapter 7 and Chapter 11. Under a Chapter 7 filling, you get to keep certain property (this is where state laws vary), but the rest is turned over to a court-appointed trustee who sells your stuff or gives it to lenders to satisfy your debts. Under a Chapter 13 filing, you pay back your debts under a plan worked out by the court. The trustee collects payments, pays off your debts and makes sure you stick to the plan.

If you own a business, you may want to consider a Chapter 11 filing. This let’s you stay in business, as long as the court and the people you owe money to approve of the plan to pay off your debts. If the court decides a trustee needs to be appointed, the trustee takes control of your business and its assets.

Not all debts can be wiped clean in bankruptcy. The list includes alimony and child support, taxes, court fines and most student loans. New debts, taken on after the discharge, aren’t’t included. And if the judge finds out you’ve lied or committed fraud, your discharge can be denied.


You can also choose which debts you want to have discharged while you keep paying off others. You might want to work out a payment plan so you can keep your car, for example. To do this, you have to sign a “reaffirmation agreement,” which says that you promise to pay off that debt. If you don’t pay it back, the creditor can send it to a collection agency like any other debt.


If you’ve filed a Chapter 7 bankruptcy and gotten a discharge, you’ve got to wait 8 years before you can do it again. There are different limits on filing for Chapter 13, depending on whether you’re trying to get debts discharged.
If you’re having trouble making payments, or even behind by a month or two, contact and attorney and or your lender before you get further behind. If you can, do this before you are 30 days late or before you receive the official “notice of default,” saying you’re several months behind, you still have time before the formal foreclosure process begins.

First of all, you need to get “REAL” about your situation. You need to take a good hard, long look in the mirror and decide if you can really afford your home and if you really want to save it. Either way, you are going to have to make a plan and your going to have to act on that plan.

So you may have to consider moving. Even if you do lose your house, you don’t want a foreclosure on your record when you go looking for a smaller house or a place to rent. One option is to ask the lender to hold off on foreclosing until you sell. If you’re mortgage is bigger than your house is worth, your looking at what’s called a “short sale” and you’ll owe money to the lender even after the house is sold. In some cases, lenders will let you off the hook for that amount rather than go through the expense of foreclosing. But you may not be completely off the hook: you may owe taxes on that amount.

You can also try something called a “deed in lieu of foreclosure” – which basically means you turn over your house to the lender and walk away without owing anything. But you’ll need to work this out with the lender.

A good attorney who knows real estate and mortgage law can help you when you are facing foreclosure. If you cannot afford proper legal representation, then you should seek assistance for a legal aid or pro bono attorney. You can also seek a referral from your local BAR Association or get help from a legit credit counselor (from an accredited, non-profit agency, not the slime balls who spam you with bogus promises of making your debts “go away”) .

A competent third party is a great choice for most people because they may be able to help smooth the process and make sure that no laws were broken by the lender when you took out the loan.

If it is found that Truth in Lending Act, RESPA and other predatory lending laws violations were made, then you may have legal recourse to sue your lender. Then a bankruptcy would not be needed and you can save your home and your credit form a foreclosure.

If you never seek proper legal advice, then you will never truly know what rights and avenues you have to “properly” defend yourself against your lender.

[No Gravy]

Originally Posted by Moe

There are different ways to file for bankruptcy, and not all of your debts have to be included. So even if faced with bankruptcy, you’ll need advice from someone - either a good credit counselor or a bankruptcy attorney - who can walk you through the choices you’ll face.

At the risk of being a newbie who disagrees with the forum owner...I'm going to have to here.

*All* debts need to be included, or the consumer faces being charged with bankruptcy fraud. Even accounts with zero balances now have to be included in a bankruptcy (per two different bankruptcy attorneys I've talked to, face to face). I know it didn't used to be that way, but it is now. The last attorney I spoke to (and the one I'll be using) said even when there's a zero balance, what he's seeing is the account gets closed by the creditor, regardless. He also strongly advised against reaffirming any of my accounts.

You can *try* reaffirmation, though most BK attorneys advise against it. In my case the problem is I have a lot of accounts, but many are owned by the same big banks/parent companies, like HSBC, GE Money Bank, and Citibank. If you include one Citibank account, chances are they won't let you reaffirm on another with a small balance.

And then some of them will refuse to take your money (crazy, but true!)

I owe very little to Lowe's ($100 and it's on a deferred payment until 7/2009), Penney's ($70, which I could have paid off), and Walmart ($1k balance). All are served by GE Money Bank. In the interest of rebuilding my credit, I wanted to reaffirm with all these companies. Walmart I've had since 1994 (my oldest trade account), Penney's since 1997, and Lowe's almost as long. Never late with any of them.

When I spoke to GE Money Bank's BK dept, the rep said their policy was to close all accounts even if they were a zero balance, and they do NOT allow reaffirmations.

I still have no option but to file bankruptcy, but this was a first: having a creditor refuse to accept my money.

[Teresa61]

I just got a letter today saying that my file had been referred to their attorney (Wells Fargo) with instructions to begin foreclosure proceedings. I am (as of Sept 1) 5 months behind. I am planning on filing bankrupcy as this is the only way I can ensure I won't have a deficiency judgement. This is a homesteaded property. Am I too late to stay the foreclosure while I save money to move???? Moe said above that it is best to file before the formal notice is recieved. There is no way I can save the house but I really have no money to move right now..... and need more time to raise money to move. How much time do I have before the sale and sherriffs notice ends up on my door?

[felixalynn]

I have a friend who is in terrible trouble and Im trying to steer to a worthwile lawyer.
I can briefly give you her scenario, the little that I know.
2 mortgages 8% and 13%
Have been default since last november.
Both pensioners. She is primary mortg holder. Have written letters to lenders, but the people who serve the notice for foreclosure has been trying to serve her.
Last week her husband/fiance had a very bad accident and now is critically ill in hospital, rehab will take several months, but he is still critical.
She has begun work but only on contract for a year. She is overwhelmed right now and doesnt know what to do first.
I believe she needs a lawyer to help her with this because she is trying to get thru this tragedy right now. Her fiance has no insurance and she is trying to work with agencies for this and where his rehab will be begin when that comes about.

I spoke with her last night and between working, hospital visits, and trying to decide what to do with foreclosure she is overwhelmed. Some of the load needs to be taken off of her shoulders so if anyone could provide some advise regarding a lawyer that could help her I will pass the info to her. She has all the documents and letters that have been sent to the lenders, so everything is documented well. She would like to stay, but feels like running right now.

I await any advise.
Thank you so much.

[Moe Bedard]

You would need to either check

National Association of Consumer Advocates – Consumer Protection Advocates and Attorneys

or

The bar association of the state that she is in would be a good resource.

[kshannondc1]

Moe or anyone else, can you help me with a question?

We are intending on filing ch.7 very soon. Our house has a first mortgage and a heloc loan. Can we do a deed in lieu of forclosure? How does that work? I would rather just hand the keys over than worry every day how long we have. If we did something like that, does it show paid as agreed on his credit? Please help.

[Moe Bedard]

you would need to ask the bk attorney this question............for a deed in lieu a lender will normally not do one on a property that has multiple liens........you would need to first find out what the bk will do to the liens.