Declaring bankruptcy, or legally stating one’s inability to pay off debt, can provide a homeowner with relief from creditors and—if faced with foreclosure—protection from a lender’s deficiency judgment. However, it can also leave the individual with lasting financial and emotional wounds. While declaring bankruptcy may temporarily halt foreclosure proceedings and allow for the reorganization of debt, in most instances the homeowner will be forced to vacate the property and foreclosure will be imminent.
.Bankruptcy is also stated on one’s public record and can remain there for 7 to 10 years. This lowers one’s credit score significantly, showing lenders and future employers a history of financial challenges and low creditworthiness. For instance, a low credit score due to bankruptcy could inhibit future attempts to obtain another home mortgage, and may affect an employer’s willingness to hire an individual.
The emotional effects of bankruptcy are less recognizable than the fiscal ones but no less distressing. Declaring bankruptcy is ranked among the top life-altering negative events one can endure and it can negatively affect one’s emotional and psychological state, making recovery a challenge.
Perhaps the most damaging misconception about bankruptcy is that it is a “get out of debt free” card. It cannot erase the financial obligations of taxes, student loans, child support or alimony. In addition, bankruptcy is not a solution for everyone. Each situation is unique, laws vary by state, and the procedure is complex and lengthy. It begins with a petition for bankruptcy, including whether you fall under chapter 7, 11 or 13 of the Federal Bankruptcy Code, which can be up to 60-pages long. Then you need to gather and organize personal documents stating assets and liabilities, income and expenditures, contracts and leases, and other financial affairs. Filing for bankruptcy is a legal process and if it is your decision to pursue this path, you should consult with a specialized bankruptcy attorney. In order to confidently choose a solution for your circumstances, it is important to be aware of any potentially less-damaging alternatives. In many cases, mortgage payments represent the largest portion of an individual’s debt. It’s helpful to consider looking at one’s debt with the mortgage payment eliminated or replaced by a lower rental payment. Would this alleviate the financial strain?
Homeowners facing financial hardship, showing a monthly shortfall and heading toward insolvency may qualify for a short sale, in which a home is sold for less than the mortgage amount owed. A short sale is a dignified alternative to foreclosure, with less harmful effects on a homeowner’s credit score, future home loan eligibility, employment and security clearance. Through this process, certain homeowners may even be able to recover some existing equity. Short sales have become a strong and beneficial solution for homeowners, and lenders and the government are fully supporting them.
Sandy Wagner
Short Sale Specialist - Helping people find a way out of foreclosure
253.225.8322
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