I must start out by first saying that I am not a bankruptcy attorney and by no means an expert. I am writing this post from the standpoint of being a Massachusetts Short Sale Realtor and what I have experienced. If you are in a pre-foreclosure situation and you are considering a bankruptcy to save your home you should consult with a bankruptcy attorney.
When should I consider a Bankruptcy prior to a Short Sale or Foreclosure?
- A bankruptcy should be considered, if the restructuring of your debt will allow you to afford to stay in your home. If you have very little debt above and beyond your mortgage, bankruptcy may not be an option. Basically a reduction of your debt will allow you to afford your mortgage. There are certain circumstances where a second mortgage may be completely removed in what is know as mortgage stripdown.
- If you know you will have to do a bankruptcy regardless of any outcome from a short sale or foreclosure a bankcruptcy should be considered right away. Knowing that regardless of any outcome, you will have to do a bankruptcy there are some benefits to a bankruptcy prior to a short sale or foreclosure. One thing the bankruptcy may do is prevent you from owing any deficiency balance on a short sale or foreclosure if one should come about.
- I have worked with attorneys who will use a bankruptcy to stop a foreclosure auction on the day of the auction. Basically, the attorney filed an emergency stay to delay the auction long enough for the seller to get the home sold. In these cases the homeowner wanted to avoid a bankruptcy and the filing would later be withdrawn so there would be no bankruptcy on the homeowners credit score.
When should Bankruptcy not be considered prior to a Short Sale or Foreclosure?
Bankruptcy should not be considered if the bankruptcy will not allow you to keep your home and there are no other benefits to you. First of all you should always try to avoid foreclosure, you have several options to do so. On of the more popular options is a short sale. Many times, in a short sale, we negotiate the settlement of the deb,t preventing the lien holder from pursuing a deficiency judgement for any deficiency balances. Sometimes a lien holder may retain the right to go after a deficiency judgement in a short sale. When they do, many times they do not pursue the deficiency judgement as the banks feel they are chasing money they probably will not get.
Many homeowners are trying to avoid a bankruptcy and a foreclosure on their credit. A short sale is one avenue to prevent either of showing up on your credit report. After a short sale, if the bank then does decide to pursue a deficiency judgement against you, is the time to consider a bankruptcy.
Some things to know about Bankruptcy
- Bankruptcy is not a panacea to all your financial problems. There are ramifications to bankruptcy and it should not be taken lightly.
- A bankruptcy in many cases will not save your home. Many times I talk to homeowners a year before doing a short sale for them. They have gone into bankruptcy thinking it will save their home, only to find that they were back to facing an imminent foreclosure. Ask questions and make sure the bankruptcy is right for your situation.
- While in a bankruptcy, a lien holder(bank) can file for a stay of hardship and a month or two later your home is back in the foreclosure process.
- If you manage to keep your home through the bankruptcy process (unless you pull off a mortgage stripdown) you will still owe all arrearages and penalties occurred prior to the bankruptcy. Typically you have 5 years to get caught up.
One last consideration
Many times I see home owners drive themselves crazy and spend good money after bad in trying to save their home. If you owe $400,000 on your home and it is now worth $260,000, is it worth paying on an asset that is no longer worth anywhere near what you paid for it? Remember, I have never seen a bank readjust the house price. You will always owe the money you borrowed against your home. It would take 15+ years at a modest appreciation to even get close to what you owed on that home. Ask yourself, is it worth it?
Disclaimer- Again, by no means am I an attorney or an expert on bankruptcy. This post should not be considered legal advice and if you are in need of legal advice please consult an attorney. Many bankruptcy attorneys offer a free consultation to go over your situation and at times bankruptcy can and should be part of your pre foreclosure strategy.
I have provided this post, because I know if you are concerned about losing your home, finances may be difficult and you are looking for information on the internet and I wanted to share what I have seen with bankruptcy that has or has not worked for upside down homeowners to give you a starting point.
If you have you are facing foreclosure or missing mortgage payments, feel free to call. As a Massachusetts Short Sale Realtor I have helped guide many home owners through their options. Call 978-360-0422