When you’re feeling extreme financial pressure, especially when it involves being behind on your mortgage, you probably feel assaulted on all sides. It might be easiest to avoid dealing with the situation, but we all know that ignoring it won’t work for long. In this post, we’ll explore what foreclosure and bankruptcy actually mean; in order to decide which is better for your particular situation, though, you should seek the advice of one of the experts at Burr Law.
Who Is The Actor?
Foreclosure happens TO you. Your mortgage company or bank initiates foreclosure on your property when you are behind on your mortgage payments. You do not have control over the timing, or any other part of the process. On the other hand, you CAUSE bankruptcy. You make the decision to pursue bankruptcy, and which chapter to file. You decide when it is best to begin the process and which exemptions to go with (Wisconsin is one of only 16 states where you can choose the state or federal exemptions).
Will You Definitely Lose Your Home?
The purpose of foreclosure is for the bank or mortgage company to reclaim your home, so you would no longer be able to live there. Once the foreclosure process has been begun, you have few options to prevent that from happening. And all of them need to be approved by the mortgage company. You can try to negotiate a loan modification or a forbearance, though usually the time to do that would be before the foreclosure has started. The only real way to guarantee that you will not lose your home is to pursue reinstatement of the loan. Wisconsin redemption law allows you to have the mortgage reinstated any time before or after judgment, but before sale. However, Wisconsin’s redemption law is complicated, and it also changed significantly on April 27, 2016. Even if foreclosure has begun, when you file for bankruptcy, all collection activities must cease. So that automatic stay pauses the foreclosure. In bankruptcy, whether you file Chapter 7 or Chapter 13, there is a very good possibility that you will keep your home. If you have a second or third mortgage on your home, that can be declared unsecured debt and entirely eliminated by Chapter 7. The past due mortgage amounts can be considered along with all other secured debt and a reasonable repayment plan devised.
Will You Still Be In Debt?
There is the danger that you might face a deficiency judgment after the foreclosure process ends. What this means is that your bank or mortgage company is not able to recover the entire amount owed to them and therefore they are legally allowed to go after you to recover that excess amount. For example, if you owe $350,000 on your mortgage and the bank sells your property through foreclosure for $250,000, it can then file a claim against you for $100,000. So it is possible for you to end up homeless, and still significantly in debt. With Chapter 7 bankruptcy, all unsecured debt is completely eliminated and you should emerge from the process completely free of debt. In Chapter 13 bankruptcy, your debt may be much less than it was, and you will have a 3 to 5 year plan to repay your creditors that the court approves.
What Happens to Your Credit?
Whether you go through foreclosure or through bankruptcy, your credit score will be affected. Foreclosure stays on your credit record for 7 years; bankruptcy for 10. That doesn’t necessarily mean that bankruptcy is worse for your credit than foreclosure though. If you’ve been paying all your credit card bills, but not your monthly mortgage, your current credit score may be high; foreclosure will cause a significant drop, and you will lose your home. Once you have gone through foreclosure, it will be extremely difficult for you to get another mortgage. In bankruptcy, there is a good chance that you can keep your home, and while the bankruptcy remains on your credit report, it does eliminate all unsecured debt. Another factor to consider is the state of your credit score currently. If you are in significant financial distress, it is likely that your credit score is already low. Bankruptcy may decrease it further, but the actual effect will probably be small. There are credit cards designed to help people re-establish creditworthiness after bankruptcy.
The choice between foreclosure or bankruptcy is complicated, and it is best to speak with the professionals at Burr Law. We can analyze your specific situation and advise you on the best course of action for you.