Doing Nothing Allowing a Foreclosure to Take Place Foreclosure vs. Bankruptcy

Doing Nothing
Allowing a Foreclosure to Take Place
Foreclosure vs. Bankruptcy

When would a person choose to allow a foreclosure to happen and just walk away from their home?

A. Sometimes personal circumstances dictate that when compared to all other options foreclosure may rank as best. In other cases people may no longer possess any options except watching the foreclosure.

Q. How about a deed in lieu of foreclosure or short sale rather than bankruptcy or foreclosure?

A. In most cases a deed in lieu of foreclosure or short sale would be better than a foreclosure or bankruptcy. This FAQ deals with situations where a deed in lieu of foreclosure or a short sale either offers no advantage or they became unattainable. If you think you might still have a chance for a deed in lieu or a short sale your should call a foreclosure mitigation professional.

Q. When would a foreclosure or bankruptcy emerge as good as a deed in lieu of foreclosure or a short sale?

A. If because of unsecured debt or deficiencies you knew you a bankruptcy filing must occur no matter what; unless the bank allows you to walk away with money from a short sale you get little benefit from a short sale in this case.

Q. When might a deed in lieu of foreclosure or short sale not be choices.

A. Basically whenever the bank does not want to offer them. No law says they have to allow them. Yet, most of these instances happen because of poor timing or bad planning by the homeowner. With enough time and effort far in advance of an auction most banks would rather avoid foreclosure or bankruptcy too and participate in short sale or deed in lieu negotiations.

Q. I thought I read elsewhere on this site that people always have the option of filing bankruptcy to stop a foreclosure?

A. Almost always. One of our topics here now will examine foreclosure vs. bankruptcy and a bit of foreclosure vs. mitigation or bankruptcy vs. mitigation.

Q. What exceptions would stop a person from filing a bankruptcy to avoid foreclosure?

A. Most commonly bankruptcy rules regarding multiple bankruptcy filings stop subsequent bankruptcy filings before they even get started.

Q. What specific laws exist dealing with multiple bankruptcy filings?

A. For a Chapter 7, a debtor may only obtain a discharge from debt by filing a Chapter 7 bankruptcy once each 8 years. A chapter 13 may only be filed every 6 months under the most commonly seen circumstances. If you already filed a previous bankruptcy you need to talk to a bankruptcy lawyer about your own situation. Debtor's rights to discharge of debt and rights to an automatic stay, which stops a foreclosure, may vary greatly based on the details of the previous bankruptcy cases.

Q. Why would this even come up? Once you file a bankruptcy doesn't that fix everything and your problems would go away?

A. Not at all, while bankruptcy stops a foreclosure, you have to look carefully at how long it stops it and your responsibilities to make sure it never re-starts. Chapter 7 bankruptcy filings rarely offer permanent foreclosure solutions and chapter 13 bankruptcies provide long term solutions only if the debtor makes all payments required under the bankruptcy re-organization plan. Read more in our chapter 13 bankruptcy FAQ.

Q. Let's imagine bankruptcy remains unavailable, what can a person do to halt the foreclosure?

A. They can still try other foreclosure avoidance methods either on their own or with the help of a foreclosure mitigation professional, but if you have already filed a chapter 13 bankruptcy that failed the chances for a successful mitigation plan allowing you to keep the home remain small. Debtors always have the right to pay their arrearage in full to stop the foreclosure, but if they have that kind of money they would likely have stopped the foreclosure long before.

Q. When both bankruptcy and allowing the foreclosure remain as choices how does one decide on foreclosure vs. bankruptcy?

A. First answer some key preliminary questions. Do you want to walk away from the home? Do you want to keep the property? And if you do, would a bankruptcy provide the means to retain the house in the long run?

Q. I don't understand the keeping the property question, I didn't know there was a choice, I thought I had to keep the property if I could, and besides who wouldn't?

A. Look at these one at a time. No law or contract forces you to keep the house if you don't want to. There may be consequences, but you do not have to keep the house.

Q. Can you give examples to illustrate such cases?

A. I once had a client on the phone going over foreclosure prevention options. After talking about all of the ways to save the home I asked "Just to be sure, you do want to stay in the house, don't you?" The question surprised the client and they asked "You mean we don't HAVE TO stay in this hell hole?" They had sewage running into the basement, a swamp for a backyard, bad neighbors and structural problems. We settled the foreclosure in a way that allowed them to leave. I recently spoke to someone who moved because of a job reassignment. They rented their old house for a while, but with the market eroding, the balance on the mortgage far more than the value, no tenant, and no ties to the area, the person had no desire to keep the property.

Q. I see, but most people do want to keep their home, how do you know if you can?

A. Between bankruptcy and foreclosure mitigation as long as you can come close to making payments going forward you have a chance.

Q. What about all of the arrearage and bad history? Why do you only talk about going forward?

A. In terms of answering questions about people's ability to keep a house, filing bankruptcy or entering a foreclosure workout plan address the past problems. Keeping the house in the long run becomes almost all about what you can pay going forward.

Q. How much do I need to spend to keep my house?

A. That really depends on your personal circumstances, but I would say that if you can pay a minimum of 75% of your regular mortgage payment and you want to keep your house you should at least explore options to keep it. You may not end up with the house, but you should expend the time and effort to try. If you can not afford even that much or do not want to keep the house, examine the best way to walk away from it.

Q. So that's the first answer, if you want to keep the house and might be able to keep the house, you never allow the foreclosure to happen, right.

A. Yes, in that situation take action to stop the foreclosure and the sooner you start the better.

Q. If you don't want to keep the house or can not keep the house and deed in lieu of foreclosure or short sale timeframes expired, how do you select foreclosure vs. bankruptcy?

A. I would start by looking to see if there might be any special advantages for selecting a foreclosure in your situation.

Q. I never imagined there were advantages to a foreclosure?

A. Take a situation where the first mortgage holder scheduled the foreclosure. You could not save the home prior to foreclosure because you could not reach terms with the 2nd mortgage or perhaps your home became subject to judicial liens for law suits you lost. A foreclosure by the first mortgage holder wipes out the other secure positions. Using this to your advantage to keep the house and wipe out the other liens requires professional legal help. Even though it may not be through a bankruptcy filing, a bankruptcy lawyer would be most likely to have the expertise to assist you. While this situation demonstrates an exception, it illustrates how one may use a foreclosure to their advantage.

Q. But that gets back to keeping the house, how could a foreclosure work to your advantage if you want to walk away from the property?

A. While I don't like even discussing this option, the fact of the matter remains if you have no hope of keeping the house and no money, letting the foreclosure process unfold gives you the most time to regroup before you have to vacate without spending anything. Filing bankruptcy costs money, which you likely have little of it this situation, think of a bankruptcy as an investment and be sure it makes sense. Foreclosures cost you nothing out of pocket, and moving fees remain the same no matter when or why you move.

Q. How would that situation play out?

A. I have an entire FAQ about the foreclosure process and subsequent eviction, but think of it like this: You stopped paying the mortgage, and they likely would not accept a payment even if you offered one (assuming middle of the foreclosure process). You understand the inevitable outcome that a foreclosure and eviction will force you out of the home at some point in the future. Finding a new place to live takes money for deposits and moving. While you wait for that day, and it takes many months in most states, you essentially live in the house rent free. If you use this opportunity to save everything you can as money required for the post foreclosure move, it works to your advantage to let the foreclosure happen.

Q. Wouldn't the time it takes to file a bankruptcy, letting it fail, and the delay in the foreclosure keep you in the house even longer.

A. Indeed it would, but if you filed a bankruptcy with no hope for success in a chapter 13 or no good reason in a chapter 7 just for the delay, not only would the lawyer face sanctions from the court for a frivolous filing, but the case might be thrown out anyway, you might get in some trouble too and you would have wasted all the money for legal fees and court costs. Do not file a bankruptcy unless it has a chance of helping in the way the legislature intended. Keep a bankruptcy's effect on your credit in mind too, but more on that later.

Q. How else does a foreclosure help the person being foreclosed on?

A. Unless you might be an ailing pop star thinking bad publicity could rejuvenate your career, it did get M.C. Hammer a job in a Nationwide Insurance commercial, I can not think of too many more advantages to foreclosure besides those above. Let's not glorify it, going through a foreclosure comes with few upsides and in most cases and should be avoided.

Q. How about using bankruptcy to stop the foreclosure?

A. You can read more on bankruptcy compared to other ways to deal with debt in my Bankruptcy FAQ and using bankruptcy to save your home in the Chapter 13 Bankruptcy FAQ. For this FAQ I will compare foreclosure vs. bankruptcy in situations where you can not save the home.

Q. Then why would a bankruptcy help if you will lose the house anyway?

A. Mostly when dealing with unsecured debt.



Q. Unsecured debt like credit card debt?

A. That stands out as the first type of unsecured debt to examine, but in foreclosure situations many people face deficiencies.

Q. Explain a foreclosure deficiency?

A. Figure you owe $200,000 on a mortgage. At the foreclosure auction the home sells for $150,000. You owe the bank a "deficiency" in most states for the remaining $50,000.

Q. They take your house, evict you and still come after you for more money?

A. Only time will tell if the bank pursues you, but they have that right if you let the house go all the way through the foreclosure process and it sells for less than you owed on the mortgage plus legal fees.

Q. Does a bankruptcy discharge the deficiency debt?

A. Any deficiency debt gets treated as unsecured debt by the bankruptcy court, deciding on its discharge depends on the type of bankruptcy you filed and decision of the judge. In most chapter 7 bankruptcy cases the answer would be yes and in most chapter 13 cases the answer would be you would pay a fraction of the debt over a term of years. A bankruptcy lawyer could tell you what to expect in your own situation.

Q. What if I have no credit card debt, other unsecured debt and no deficiency, either because the house sold for the same or more than the mortgage or the foreclosure took place in a state that does not have laws allowing deficiency judgments and keeping the house no longer exists as an option?

A. I would not suggest filing any type of bankruptcy given that set of facts.

Q. How about bankruptcy if I have significant credit card debt but will not face a foreclosure deficiency?

A. Make the decision based on the best way to approach the credit card debt and your overall financial situation. Do not let how a bankruptcy might affect the foreclosure in the short run influence the choice to file a bankruptcy or not in cases where you know you can not stop from losing the house to foreclosure in the long run.

Q. Imagine I have no credit card debt, but I know I face a foreclosure with a large deficiency in a state when I could be sued for it?

A. This question never seems to come with a black or white answer. You have to look at all sides and make your own decision. It would be best to discuss this with a bankruptcy attorney, but keep in the back of your mind that a bankruptcy attorney may lean toward suggesting you file bankruptcy.

Q. Why would someone file bankruptcy prior to the foreclosure in that case?

A. Filing bankruptcy before the foreclosure accomplishes two things. You get the power of the bankruptcy to deal with the deficiency, in the case of most chapter 7 bankruptcy cases that means you discharge the debt it full, and you end up with a delay in the foreclosure auction.

Q. What happens if you wait until after the foreclosure auction?

A. Before the foreclosure auction you make a guess as to what the deficiency might be. After the foreclosure auction you know for sure. Perhaps you get a pleasant surprise and you do not end up with a deficiency at all.

Q. What happens if I do not end up with a foreclosure deficiency?

A. It's your lucky day, for this example we started with the concept that you had no other unsecured debt. If you have no deficiency either you have no need to file a bankruptcy at all.

Q. Suppose I was right and I end up with a big foreclosure deficiency?

A. You have many choices, and in this case no time pressure. You can file bankruptcy to discharge some or all of the deficiency, negotiate a settlement on the deficiency or just wait.

Q. Why would you wait?

A. In some cases the bank may never chase you for the deficiency. On the down side you may have the foreclosure deficiency just hanging out there for 3-6 years, but you may never hear about it ever again. You always have the option to negotiate or file bankruptcy if they start an action against you. On the other hand you may be filing bankruptcy when you do not need to.

Q. Well, what should I do about filing bankruptcy?

A. You need to make an individual decision in conjunction with your bankruptcy lawyer.

Q. What kinds of things might influence the answer?

A. 1. What is your banks specific history in chasing people for the foreclosure deficiency?

2. How much is the deficiency, the more you owe the more likely they will try to get it.

3. How likely is it they could collect now or in the future? If you have no money and will not have money in the future they may not bother. If you have other assets or might be able to pay them out of future income you might want to wipe out the debt while you have the chance.

4. How would you feel psychologically living for 3-6 years not knowing each day if the bank might come out of the woodwork?

5. How do you personally feel about filing bankruptcy?

6. Do you have the means to reach a settlement with the bank for the foreclosure deficiency?

7. Look at the timing for rebuilding your credit. If you rebuild for a few years and have to file a bankruptcy later you will setback your initial efforts.

Q. How is bankruptcy vs. foreclosure when is comes to your immediate credit score?

A. Make no mistake, bankruptcy and foreclosure represent some of the very worst things you could ever do to your credit. Compare this question to asking "Which is worse, being trampled by 100 stampeding elephants or writing a story about a towering inferno by experiencing it as a victim?" Some people would say they hate writing and choose a trampling; some dislike animals and elect a burning. The point remains both options rank as so horrible and nasty that compared to not experiencing either, they both represent events so bad attempting to identify one as better than the other becomes useless.

Q. Aside from your short term credit score do other reasons exist to choose bankruptcy vs. foreclosure?

A. Yes, even in our example, some people do possess a serious psychological fear of fire. Some people maintain a similar strong emotional objection to filing bankruptcy. In a case with no other debt issues besides the home foreclosure we need not discuss if such feelings come with financial justification or not. If the decision comes to a toss up and you would feel like a failure the rest of your life by filing bankruptcy than choose the foreclosure.

Q. What about when a deficiency or other unsecured debts do exist but you hate the thought of a bankruptcy filing.

A. You must look at the entire situation including one's feelings about bankruptcy, but you can not allow emotions take you in the wrong financial direction either. I once had a consultation where a caller had amassed $300,000 in unsecured debt. He came from a very well to do family and felt bankruptcy posed such a shameful and horrible option he refused to consider it. He hoped his family, even though they had already paid many thousands of dollars to support him financially, would give him up to $150,000 to help him settle the debts. From a dollars and cents point of view his case screamed "bankruptcy". I argued that both he and his family would be better served if he filed bankruptcy and used the family's money to start life over again. I also suggested that the family might feel that their money would be put to better use in that way. He refused to even think of bankruptcy and I refused to take the case.

Q. What about the long term effects of foreclosure vs. bankruptcy on your credit report score?

A. In either case you start rebuilding credit from a deep hole. A foreclosure or chapter 7 bankruptcy allows you to start the rebuilding process full force after the foreclosure auction or the closing of the bankruptcy case, usually in a matter of months. A chapter 13 plan can go on for 3-5 years and while you can rebuild a bit, so many options remain unavailable during the bankruptcy that reestablishing good credit can be more challenging. Chapter 7 bankruptcy stays on your credit for 10 years, a chapter 13 or a foreclosure falls off in 7. An easy answer might come out indicating foreclosure looks better than bankruptcy. For a more relevant and realistic answer figure bankruptcy or foreclosure both destroy your credit so completely that what you do to rebuild credit and the effort you put into improving your credit score afterwards emerges as much more important than where you started from or if a bankruptcy or foreclosure put you there.