Debt forgiveness can be a huge financial relief. If you recently experienced foreclosure, you may have concerns about the fate of your remaining mortgage debt. Lenders have many options to recoup the balance of the loan, including filing a lawsuit. The course of action chosen by the lender impacts many aspects of your credit score.
Mortgage Debt
Mortgage debt doesn't automatically disappear after foreclosure. A lender can choose to forgive all, part or none of your mortgage debt. In cases where all of your debt is not forgiven, financial hardship can follow you well beyond the foreclosure date. Consult with a HUD-certified foreclosure counselor to determine the rules surrounding deficiency judgments in your state. In some states, lenders can wait until you regain financial stability before filing a lawsuit. This can be months or years down the road. Avoid surprises by learning your foreclosure rights in advance.
Credit Stains
If a lender chooses to file a deficiency judgment to recoup the balance of your loan, the judgment becomes public record. Public records are added to your credit report. The longer the judgment appears as unpaid on your credit report, the more negative the impact on your credit score. Unfortunately, even after a judgment is paid, it will remain on your credit report for seven years from the initial date the judgment is filed.
Bankruptcy
Some homeowners choose bankruptcy to escape the financial burden of a deficiency judgment, but bankruptcy also can sabotage your credit score. Bankruptcies remain on your credit report for 10 years, during which opening new credit accounts is nearly impossible. Consider the sacrifice you want to make in escaping the judgment debt before committing to bankruptcy, since both have long-term ramifications.
Repaying Debt
When a lender chooses to forgive part of your mortgage debt, you may decide to make payment arrangements instead of filing for bankruptcy. However, if you were experiencing financial hardship before foreclosure, affording payments for your previous home and new residence may be a challenge. If you miss a payment toward your judgment, your credit score declines even further. Alternatively, the added burden can lead to trouble keeping up with other household bills and financial obligations.
Alternatives
Debt after foreclosure can wreak havoc on your credit rating. Foreclosure itself leads to an 85 to 160 point drop in your credit score, but coupled with judgments, bankruptcies and late payments create a dramatic decrease in your score. There are alternatives to foreclosure to help you avoid judgments and the negative impacts of foreclosure on your credit. A deed in lieu of foreclosure is a viable option for homeowners experiencing financial hardship. A deed in lieu of foreclosure occurs when you voluntarily give your property deed to your lender in exchange for debt forgiveness. With a deed in lieu, you neither have to go through foreclosure nor owe money after giving up your home.
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