Tuesday, May 25, 2010

Dealing with House Debt: Short Sales, Foreclosures & Bankruptcy - Part III

In this Three-Part Post, we will evaluate some of the different methods of dealing with real estate debt when a mortgage modification or forbearance agreement is not an option.
  • Part I addressed the most common scenario which forces a homeowner/borrower to consider how to deal with property he or she can no longer afford.

  • Part II will address short sales and their interactions with Bankruptcy.

  • Part III will address "walking away" from a property through bankruptcy, and the resulting foreclosure by the lender.

Part III: Bankruptcy & Foreclosure

A final option is to simply file for bankruptcy, and indicate that the debtor's intention is to surrender the property to the bank. (For purposes of this post, I will not address how a Chapter 13 Bankruptcy can save a house from foreclosure). Procedurally, the Bankruptcy case will progress through the Bankruptcy Court, and eventually the secured lender will seek permission from the Bankruptcy Court to be relieved of the automatic stay protections, and begin foreclosure proceedings. Regardless of whether the foreclosure auction is completed by the bank before or after the debtor's discharge (meaning they no longer owe certain debts, including the mortgage debt), any deficiency from the foreclosure auction is discharged by the bankruptcy court. From the debtor's perspective, the whole process is completed through the bankruptcy, and does not require any specific participation directly with the lender.

This option provides a swift resolution to the issue of past-due mortgage debt, the pending foreclosure on the property, and any mortgage deficiency all in one process that, in the case of a Chapter 7 Bankruptcy, can be completed from filing to discharge in under six months. It is best utilized when the lender will not agree to a short sale, when there is insufficient time to arrange a short sale, or when the debtor's other financial concerns (such as collection actions on other debt) require immediate action. It also does not require the lender's permission or cooperation - provided you qualify for bankruptcy, the Bankruptcy Laws dictate the result, not the lender's business decision.

The credit implications of a foreclosure and bankruptcy (or in the context of bankruptcy) are more detrimental than a short sale followed by bankruptcy, if the debtor wants to obtain a mortgage again in the future. Following a foreclosure, the debtor will have great difficulty in obtaining a future mortgage for the 10-year period that the foreclosure will remain on the debtor's credit report for mortgage and employment purposes. The foreclosure will not appear on the debtor's consumer credit report for 7 years following the foreclosure, meaning credit cards and car loans will be more easily attainable at that point.

Dealing with debt can be a daunting challenge for many individuals. Don't go alone. An attorney with Kelsey & Trask, P.C. can help you make these difficult decisions, and help you with the process. For an initial consultation, click here, or call 508-655-5980.

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