Foreclosure & Debt

Even if you are faced with significant debt, paying your mortgage should be your top priority. If you don't meet your mortgage obligations, you risk foreclosure and the loss of your home. Recovering from foreclosure can be significantly more difficult than recovering from other types of defaulted debt, particularly since going through a foreclosure can make it very difficult for you to find new housing.

Foreclosure

When you can't pay your mortgage, your lender begins its collection process. You'll start getting letters and phone calls about your back mortgage payments, and eventually your lender will begin foreclosure proceedings. The exact process depends on the laws in your state, but it involves the bank reclaiming your home and then selling it in order to recoup your mortgage balance. Eventually, you will be evicted from your home unless you can persuade your lender or your home's new owner to rent it to you.

Foreclosure Effects on Credit

Foreclosures will significantly harm your credit score and can take as much as 160 points off your score. A foreclosure is also a red flag to potential landlords and mortgage lenders: If they see that your financial situation got so bad that you couldn't make your housing payments, they may be very reluctant to do business with you for fear that you might default on your payments again.

Foreclosure Prevention

Contact your mortgage lender to find out about options for preventing a foreclosure. In some cases, you may be able to make lower payments or delay payments while you deal with your financial situation. If neither of these options work, you may also be able to offer up your home in a short sale in which you sell your home for less than your mortgage balance and your lender forgives the rest of the debt. While a short sale will cost you your home, you'll avoid having a foreclosure in your credit history.

Bankruptcy to Avoid Foreclosure

If you are having difficulty paying your mortgage due to temporary circumstances, and attempts at working with your mortgage lender have failed, look into Chapter 13 bankruptcy. This type of bankruptcy allows you to repay your debts, including past-due mortgage payments, over time. The catch is that you must now have the income to keep up with your current mortgage payments, as well as to meet your obligations in a Chapter 13 repayment plan. While bankruptcy will damage your credit score, you'll be able to stay in your home. Speak to a bankruptcy attorney to see if this option will work for you.