Bankruptcy will hurt your credit but it can help you stay in your home
If you have fallen behind on your mortgage payments, you may feel like you’re stuck between two unpleasant options: allowing the lender to foreclose on your home or filing for personal bankruptcy. So which option is worse?
It’s actually really hard to provide an absolute answer to this question. Whether you choose foreclosure or bankruptcy—or both—really depends upon the details of your specific situation. However, we can provide some general advice that will help you start to think through this decision.
The first question you should ask yourself is:
What is Your House Worth?
If you do not have significant equity in your home and you are actually upside down in your mortgage, it may be best to just cut the bad investment loose. This will enable you to move to something you can afford. Ideally, you would want to make this decision before you actually have to foreclose on the home. If you can convince the lender to allow a short sale, you can get out of the house without a big hit to your credit. However, you will lose your equity in the home.
How Far Behind Are You on Your Payments?
If you are not upside down on your mortgage, it may be in your best interests to file for bankruptcy with the intention of keeping your home. However, you should only do this if you are confident your financial setback is temporary and you will soon be able to get back on track with your mortgage payments.
Here’s how it works:
Any bankruptcy proceeding will temporarily stop any foreclosure proceedings, giving you valuable breathing room to catch up on your payments.
Chapter 7 bankruptcy is best for individuals who are only a little bit behind on their payments. Chapter 7 will force the lender to file a special motion before they can continue with the foreclosure process. This can give you just enough time to catch up on your payments. Bear in mind, however, that Chapter 7 is means tested so not everyone will qualify.
Chapter 13 bankruptcy is more widely available and will give you more time to catch up on your mortgage. In order to keep your home, you will need to adhere to the Chapter 13 debt repayment plan set up by the bankruptcy court. This will require continuing to make your mortgage payment each month while also paying off a portion of your arrears and your other debts.
Which Is Worse for Your Credit Score?
According to experts from FICO, a foreclosure will automatically take at least 200 points off your credit score. Because a bankruptcy affects additional accounts besides your mortgage, it will knock even more points of your credit score. But, if the bankruptcy allows you to keep your home, your low credit score may not affect you as badly, as you will not have to apply for a rental or a new home loan in order to get a roof over your head.
Need Help Preventing a Foreclosure?
At California Bankruptcy Relief, we have ample experience in foreclosure defense. We will be happy to explain your options to you and guide you through the process if you choose bankruptcy.
