George Wolf
Jul 18,2008
In: Foreclosure

Foreclosure Versus Bankruptcy

As apprehended and predicted foreclosures are galloping across the country with no signs of let up; rather it is gaining speed.

For many borrowers who have no other choice there is one alternative left. Will they accept foreclosure or opt for bankruptcy? Foreclosure leaves a lasting stain on the credit history making it practically impossible for the person to start a new life with a fresh loan and build another nest. But is bankruptcy protection better than foreclosure?

The foreclosure stain will remain on the credit report for seven long years while the bankruptcy will do so for a decade. To mortgage lenders a foreclosure is a very serious offence, because the house is concerned, whereas the bankruptcy stain has nothing to do with a specific property.

The first thing is to go all out to try and avoid foreclosures by immediately contacting the lender and working out alternatives. So long as foreclosure proceedings have not started there is hope.

A little bit of introspection is necessary. Does the borrower really want to keep the house? If so there are many alternative plans. The loan can be modified at a lower rate. Another is forbearance. But if the loan is too much and one cannot run along then all these options will not help. The lender can be requested to wait until the house can be sold. Even then taxes may be due.

Another option is deed-in-lieu by which the house is turned over to the lender and the borrower walks away with a clean slate. One cannot pop the keys into the mailbox and drive away. In all these cases specialized help counts.

If everything fails then comes in the option of bankruptcy. There is no flat rule that will fit all borrowers. It is individual specific. There are many ways of filing bankruptcies. Lately bankruptcies are becoming quite common. Federal laws govern bankruptcies rules. But the laws of the state as regards financial debts and disposition of estates also have a role to play. For ten years the bankruptcy stigma remains. Loans are refused and even if one manages the rate is invariably high. The common forms of personal bankruptcy are Chapter 7 and Chapter 11. It is calculated that 60% use Chapter 7.

In Chapter 7 one can keep some property (according to rules of state government) but the rest is give to a trustee appointed by the court who either sells it or hands it over to the lenders to meet their dues.

In Chapter 13 filing the debts are paid back by a court worked out schedule. The trustee collects the payments and ensures that the borrower sticks to the plan.

For owners of business the best is Chapter 11. It allows for continuance of business activities so long as lenders and the court approve of it for paying off dues.

For those who have opted for Chapter 11 there must be a gap of 8 years before one can file it again. There are limits on Chapter 13 also.