High student loans, housing costs, and medical expenses leave many struggling financially. Luckily, there are a number of options to choose from if you find yourself in this situation. Bankruptcy and foreclosure are two of the most common options. Both are fact specific, paperwork intensive, and vary from case to case. If considering relief through bankruptcy or facing the possibility of foreclosure, it is important to speak with an experienced bankruptcy attorney to determine the best action for you.
After falling behind a few months’ mortgage payments, lenders (most commonly banks), will move forward to foreclose on a home. Before foreclosure begins, there are a number of options a debtor can look into, including loan forbearance, short sale, and deed in lieu of foreclosure. After the homeowner is notified of the foreclosure, the lender will have the home auctioned off to recover payment for the loan. It is not guaranteed the auction will cover the total amount owed. When this happens, the debtor is still responsible for the remaining debt. Falling behind on mortgage payments does not automatically result in foreclosure or loss of a home, bankruptcy is also a possibility for debtors no longer able to keep up with their payments. See Florida foreclosure law for more information on foreclosure.
It is important to remember that while foreclosure only affects the home, in bankruptcy creditors have access to all assets not protected by exemptions. See Florida Exemptions for a complete list. Despite this, there are benefits to bankruptcy over foreclosure. Bankruptcy whether Chapter 7 or Chapter 13, when the process is complete, discharges the debtor of the remaining balance. Bankruptcy can also be viewed as giving the debtor more control. While the lender initiates action in foreclosure, it is the debtor who initiates bankruptcy. Additionally, and possibly most importantly, the moment a debtor files for bankruptcy the court issues an automatic stay order. This order, requires all creditors/lenders to stop collection activities immediately. So if a home is scheduled for foreclosure, the sale will be suspended while the bankruptcy is pending. But as always with the law, there are exceptions to the rule. To understand the exceptions and determine if they apply to you, it is important to speak with a knowledgeable bankruptcy attorney.
In additional to how foreclosure and bankruptcy affect property and assets, there are other effects to consider. While the impact of bankruptcy stays on a debtor’s credit report for ten years, the effect of bankruptcy varies on a case by case basis and can actually improve low credit score by removing the debt. In contrast, foreclosure drops the score of the debtor anywhere from 200-400 points and remains on a debtor’s credit score for seven years. Foreclosure also places restrictions on a debtor’s eligibility to buy a home within 5 years with court restrictions or within seven years with no restrictions.
If overwhelmed and facing substantial debt, it is important remain calm and consider all your options. Foreclosure and bankruptcy are two common actions taken in response to debt. If either of these actions are in your future or looking for other options, you should speak to an experienced bankruptcy attorney to determine the best course of action for you.