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If you are facing foreclosure, and you owe close to or more that what you house is worth, then you have 5 options available to you. We know that this may be an emotional time for you and your family, but we suggest that you try and look at the situation from an analytical point of view. Don't let any emotional attachments that you may have to your house, influence you into making a decision that may be pleasing temporarily, but destructive in the long-term.
Also keep in mind that the clock is ticking and it doesn't stop. You need to take action right away so you can stop the foreclosure, protect your credit, and protect your financial well being. All of the options available to you take time to implement and execute. So regardless of which option you choose, the sooner you get started, the more likely you are to see a successful outcome to your situation.
Your 5 Available Options:
Reinstate The Loan
Attempt a Loan Modification
File Bankruptcy
Let The House Go Into Foreclosure
Sell The House Via a Short Sale
1. Reinstate The Loan
If your hardship was only temporary, and you would like to stay in the house, then reinstating the loan may be an option for you. You can simply bring the loan current by paying the lender any outstanding balance and fees that you may owe.
Oftentimes people in this situation will turn to family and friends to borrow the money to do this. However we encourage you to use extreme caution in these circumstances. Borrowing more money will create a higher payment for you, so unless the hardship is temporary, this may not be the best solution. (Especially when personal relationships are at stake)
2. Attempt a Loan Modification
A loan modification is when a lender adjusts the terms of your loan. They can do this by lowering the interest rates, changing an adjustable-rate into a fixed-rate, or by extending the length of the loan. The purpose of doing this is to decrease the borrower's monthly payment. However by doing so they often increase the overall principal amount that's owed.
3. File Bankruptcy
If you are considering filing bankruptcy, you must seek out a qualified attorney. This is not legal advice.
The two types of bankruptcy that are available to consumers are Chapter 7 bankruptcy, and Chapter 13 Bankruptcy. A Chapter 7 Bankruptcy is known as a liquidation, (all of your debts are wiped out). To do this, first your assets and debts are frozen, and then the court decides which of your assets (home, cars, furniture, business equipment), will be sold in order to pay off those debts.
Chapter 13 bankruptcy is known as a reorganization. In this case, you work with the creditors through the court, and you reorganize your debt so that you can repay what you owe over a course of 3 to 5 years.
A bankruptcy may legally stay on your credit for 7-10 years, and it has serious financial repercussions that you must consider. Therefore if the main source of your financial distress is your mortgage payment, then you may wish to consider an alternative other than bankruptcy.
4. Let The House Go Into Foreclosure
If you choose to do nothing, then the house will end up in foreclosure. This is the worst option in that next to bankruptcy, it has the most damaging affect on your credit.
Furthermore, if the property is an investment property or if the loans on the property are not 'purchase money' loans (meaning that you've refinanced the property) then, the government will perceive any loss the bank suffers as being income to you, and you will be taxed on this money according to your tax bracket (unless you can prove an exemption). The bank reports their loss, by issuing you a 1099-C which you must report on your taxes.
It's also important to know that if a property is sold at foreclosure auction, the lenders loss will typically be much greater than if it was sold through a short sale. This is because properties generally sell for a much lower percentage of their value at an auction, than compared to when they are sold through a short sale listing.
5. Sell The House Via A Short Sale
The most desirable option is for you to sell the house with a short sale. A short sale gives you the greatest amount of benefits, with the least amount of negatives. For many homeowners, this is the preferred option as it makes the most fiscal sense.
We will now move onto discuss what exactly a short sale is, and then look at the specific ways in which you will benefit from doing one.
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