An unfortunate sign of the times is that many people who face foreclosure are contemplating whether to file for bankruptcy protection as a stop-gap measure to give them more time before losing their home.
My first piece of advice to people who face this quandry: Hang in there. I faced it many years ago myself, and thankfully we have recovered nicely, though it did take some time.
My second piece of advice: If your only justification for filing for bankruptcy protection is to delay your foreclosure proceeding, don’t do it. This is only my (non-professional) opinion, but here’s why I believe this:
1. A bankruptcy on top of a foreclosure is more damaging to your credit than a foreclosure alone. The more negative items on your credit report, the lower your score. And remember: Just filing for bankruptcy does not automatically mean that your creditors cease to [negatively] update your credit history. Getting a foreclosure means only that you have a foreclosure on your credit history. Filing for bankruptcy means you’ll have the bankruptcy AND foreclosure on your credit history.
2. If a foreclosure is the only financial obligation for which you’re delinquent, bankruptcy is unlikely to be helpful. Generally speaking, bankruptcy is worth considering when there is a mountain of unsecured debt spread among many creditors. (Yes, there are exceptions.) But if your only debt is a property that is nearing foreclosure, it will be worth considering the relinquishment of your property and the associated release of some or all of your mortgage debt.
3. Bankruptcy is not a good stall tactic. Generally speaking, you’re going to get no more than a couple of months of stalling as a result of filing for bankruptcy if you’re not a legitimate candidate for bankruptcy. And the net effect will be that you have a bankruptcy filing on your credit history for an entire decade in exchange for an extra month or two (at most) of living in your current home.
Allow me to reiterate that I do understand the pain that this type of circumstance brings. The good news is that because foreclosure is so rampant right now, landlords are frequently being a bit more flexible in terms of their qualification criteria. Particularly if you have never had financial trouble prior to the current economic weakness, you could make a good case why you are a good risk despite the foreclosure circumstance you’re now facing.
Additionally, there are MANY properties that are good candidates for creative acquisition through subject-to, land contract or lease options. If you need a place to live and don’t have the credit to support a traditional mortgage, a creative solution like those listed above may be a good way to fill your needs. (Let me know in the comments area below if you’d like more information on how to find and implement these types of transactions… the home I live in right now was purchased via Subject-To.)
Once again, hang in there. It’s a tough time for many people right now, but your silver lining will come.
Thank you for reading http://RealEstate.BryanEllis.com – your comments are welcomed below!
Bryan- great advice. I too am not an attorney. However, I have talked with many attorneys about this topic.
Every BK attorney with whom I’ve spoken believes everyone should have at least one BK in his/her life time (through him or her of course).
Still, BK may not be the option as you’ve noted. Surprising to you and me and many (if not all) people following your blog is that most people do NOT know what a short sale is.
They don’t know how a short could help them avoid foreclosure (or BK).
In the Sarasota (FL) to Orlando (FL) I work many short sales and face people of all income brackets who aren’t aware of legal strategies for delaying foreclosure.
When I receive calls, one of my first questions is, “Would you like to keep your home, if at all possible?”
If they do, we look at options. In some cases, I refer them to a law firm that provides foreclosure defense. For up to 2 years, this law firm will delay foreclosure giving us leverage against lenders that play hardball.
Simply, we know lenders pay a flat fee to the law firms pushing foreclosure paperwork for the lenders. If a plaintiff or plaintiff’s lawyer initiates affirmative defense including but not limited to “proving ownership,” the lender must pay a helluva lot more in legal fees than the flat fee.
I’ve shaken many obstinate lenders (owners of debt) off the fence with this strategy.
In addition, it matters whether a property owner is in a recourse or non-recourse state. It’s not difficult today to show hardship, so this becomes a business decision.
Last, be aware many lenders are approving short sales with lien release (ONLY) demand letters. Be careful. Especially if your property is in a recourse state such as Florida, pursue FULL PAYOFF & SATISFACTION.
Thanks, Bryan, for sharing useful, quality information. By the way, I too have faced foreclosure. I had to undergo a crash course in short sales to avoid foreclosure.
Little did I know my real estate business would become 100% short sales. As draining as short sales are, the people I help are soooooooooo grateful.
A short sale is heavens above a foreclosure and a bankruptcy, and I’m not talking about credit.
Saving credit is not the single biggest reason to avoid foreclosure. In my mind (and I have explicit knowledge of this from my fixmyuglycredit.com website, debt collectors in a RECOURSE state will pursue deficiency amount for YEARS after they record a judgment.
Are you aware a judgment can be renewed for years more of harassing debt collections?
Hope this helps,
Mike