Foreclosure presents many risks. It is not possible to "file" for foreclosure, although some people voluntarily walk away from their homes through what is known as a strategic default. Strategic defaults occur when people weigh the pros and cons of foreclosure and decide to walk away even if they are capable of making the payments. They may be unhappy with the neighborhood or disappointed that their home has dramatically declined in value. Some homes purchased at inflated prices during a strong economy can lose a third or even half their value during a recession.
Credit Score
Foreclosure can have a devastating effect on credit scores. It is one of the most negative credit events possible because it shows future creditors that you defaulted on one of your most important loan obligations. That can paint you as a poor credit risk and make it impossible to qualify for another mortgage for several years, especially if you voluntarily allowed the house to be foreclosed.
Court Action
Houses are sold at auction or at private sales after foreclosure, and the lender applies the proceeds to the balance on the loan. Most states allow lenders to file lawsuits to collect the difference if the house sells at auction for less than is due on the mortgage. A house selling for $50,000 at auction with a $75,000 loan balance could lead to a deficiency judgment in court. The deficiency judgment orders you to pay the shortfall or risk garnishment of your bank account or wages.
Collections
Mortgage companies don't always immediately seek deficiency judgments. Some state laws allow banks to wait several years before filing a lawsuit. The banks use that as part of their collections strategy, figuring your financial situation may improve in a few years and you will be in a better position to pay the shortfall.
Bankruptcy
Deficiency judgments force some people to file for bankruptcy, another risk of foreclosure. The judgment is an unsecured debt and can be eliminated in just a few months through Chapter 7 bankruptcy. Another option is Chapter 13, but it requires a payment plan of three years to five years. For a while you'll really have a hard time finding affordable credit with a foreclosure, judgment and bankruptcy all on your credit report at the same time.
0 comments:
Post a Comment