Bankruptcy vs. Foreclosure

[doodah12]

Hi,
I'm hoping someone could help with some advice regarding my situation. I'm a homeowner who invested in 2 rental properties during the height of the market. Since then because of the subsequent housing bust, both my properties are underwater, and me and my wife have basically maxxed out all our credit (about $50,000) trying to keep the mortgages paid. Rentals have been slow and infrequent, and we've fallen behind on payments, and one property is at the beginning of the foreclosure process. We've had both units on the market for almost 2 years and have lowered the prices where we've lost all equity, but would be able to pay off the note, but both remain unsold. I want to know how much of a difference there would be to our credit if we let both units be foreclosed and try to get them off our balance sheet, versus going through personal bankruptcy, and losing the units and eliminating much of our consumer debt. I've felt that with these later payments and possible foreclosure(s), we're just delaying the inevitable, and would get a fresh start through bankruptcy. I make a good salary, but every month I have to pay 3 mortgages, and we don't have anything left over to live properly. If I do go through bankruptcy I want to keep my residence, and I have a little equity in it. I had another question, will the 2 rental properties be totally discharged in the bankruptcy, meaning, will I have to cover the deficiency balance, as I would in a regular foreclosure?, also what about a home equity line of credit secured against my residence, I assume that is not dischargeable? Any advice on bankrtuptcy vs. foreclosure (impact on credit reporting) would be very helpful, thanks.

[waterman]

Sorry to hear about your situation, your in the hole- but you can get out! The foreclosure will do just as much damage to your credit as a BK and you'll still owe the deficiency and also the home equity loan- most likely your credit is fried anyway due to the missed payments so I would not worry about that.

If you go chapter 7 then all your debt will be discharged. You will have to talk to your lawyer to determine if you can qualify for chapter 7 depending on your state there are different requirements and so on. If you get a chapter 7 that means the home equity line and any deficiency balances will be gone- all your bills will be discharged you will not owe anyone a cent. Of course if you have assets some of these might be taken by the trustee to sell so he can get the creditors some of there cash back- again that might not be an issue depending on your state.

[doodah12]

Thanks for your reply. I was under the assumption that since I want to keep my primary residence, and the home equity line of credit is secured through that property, then the HELOC couldn't be discharged? Am I wrong? (PS, I live in NJ), thanks

[waterman]

Sorry for the late reply. The home equity loan cant be discharged if you want to keep the house, you will still owe that since its secured debt. Only unsecured debt can be discharged-unless you want to give up the asset then everything can get discarded. Basically if you have no equity in the house and cant afford the HELOC- then why bother keeping the house? Be done with the debt and start fresh. Otherwise go chapter 13 and make payments you can afford, you'll keep the house and maybe get some time to boost up your income without getting drained in payments you cant afford. Chapter 13 is a pain, so only go that road if you must- chapter 7 is easy walk in, answer the questions and walk out debt free.

[BobMango]

Well I did both. Had a rental that I let the bank have in foreclosure, then after the sale I filed bankruptcy. I kept my primary residence (did not reaffirm), but it is now a rental since I relocated, couldn't sell it and can rent it for more than the monthly note. I knew that I couldn't avoid bankruptcy and the house was so far underwater (from $330K to $85k at the foreclosure sale) that I had no interest in keeping it. If I had filed before the foreclosure finished I'd probably still be waiting for the bank to take it. Letting it go sooner rather than later was the right decision. No baggage after discharge.

My 1 year post discharge anniversary is coming up in another week or so and my credit scores are in the 675-690 range, according to myfico.com. I didn't check before filing so I don't have a baseline, but just the year before I was at 740. I'm guessing in another year I'll be over the 700 mark again. Not really sweating it since I don't need to finance anything anytime soon. In another 3-4 years when the real estate market has stabilized I might consider purchasing another property, but that will be my only new debt ever again. Next car will be paid for with cash before I drive it off the lot. Good luck.

[aquavir]

If you can do the chapter 7 it will all be discharged if you don't reaffirm the house. A lot of people don't reaffirm, stop paying, wait for the forclosure to start and then try for a modification on the first loan (assuming you have 2 loans), or they move out when the forclosure goes through (essentially free housing for 6mo - 1yr). Either way, I think many people don't pay the 2nd mortgage (if the house has no equity) and look to try to settle with them at some future date for pennies (or at least dimes) on the dollar. That is the situation I'm in...we intended to let the forclosure happen and then decided last minute to try for a modification, we liked it and it left the discharge in tact. We haven't paid on the 2nd mortgage in over a year and haven't heard much from them (it makes no sense for them to forclose because they would be out the legal fees and probably get nothing from the sale). There is a ton of info on this site about what to do with the house in BK...hours and hours of reading.

But you definately need to talk to an attourney or three.

Good luck.

PS...sorry about the crappy spelling...spell check not functional on this dinosaur computer...and I'm to tired from shoveling to care...