Misconceptions about Debt

 

Foreclosure is better for my credit than a bankruptcy - Maybe; maybe not. It actually depends who you talk to on this what answer you get, but ultimately it depends how the action is reported to the credit agency, and how many other negative reports are filed; like the number of 'late payments', or 'non-payments' related to your mortgage. A bankruptcy may even "hide" a foreclosure if the property is included in the bankruptcy. This is no guarantee though. To be safe, always try to sell your property, and use a 'short-sale' if necessary (if it is included in a bankruptcy) rather than let it go to foreclosure. If the short sale is reported it will show up as a 'settled debt' rather than a 'foreclosure'(basically repossession for non-payment, with none of the debt being satisfied). This will also lessen your liability for a 'deficiency judgment' later on.

I can save my house from Foreclosure if I file Bankruptcy - Actually one has nothing to do with the other. The only thing a bankruptcy does to a foreclosure is that it will slow the process and may help you reduce the amount of your payments to the bank, but you MUST PAY ON-TIME. If you don't, you lose the protection of the bankruptcy, and the foreclosure process resumes. This is only in a chapter 13 however. In a chapter 7 your house gets no foreclosure protection - you either keep paying or you're going to lose it to a foreclosure. (I would recommend a short sale here instead to limit your liability to further credit damage and a larger 'deficiency judgment.'

To Avoid a Bankruptcy, I should use a Debt Management Program to lower my Payments - I'm not supporting bankruptcy necessarily, but an attorney has more leverage to negotiate a lower debt payment for you, as in a chapter 13. If you want to avoid bankruptcy all together, be VERY careful which debt management program you choose to use. If they require a payment upfront HANG-UP the phone immediately; NO MATTER WHAT they tell you! Avoid these services like the plague; I didn't and my mistake cost me $1400 and a lot of headaches. Don't let this happen to you. Use a Non-Profit company that only charges a small monthly fee.

If I file Bankruptcy I will be relieved of all my financial obligations - Not likely. If you file a chapter 13, you are just reorganizing your debt and getting a lower monthly payment. If it's a chapter 7, a 'discharge' of debt, you will not have to pay anything, right? Wrong! You are only protected up to $1000 of personal property (cars, furniture, bank accounts, etc.) unless you relinquish you personal 'homesteaded' home, which will give you an additional $4000 (in my home state of Florida) of exempt property. Everything you own gets a value, and above the max $5000 exemption, you must pay for. (This may still be a better way to go than having the liability that comes with a foreclosure, or even a short sale depending on your situation.)

A Short Sale will Satisfy my Debt to the Lender, ending any other Financial Obligation related to the property - Don't ever let anyone convince you of this! Unless the lender puts in writing that the short sale payoff is "payment in full", you may be liable for a 'deficiency judgment'. Unless the property is your primary, (homestead), residence for 2 of the last 5 years, the mortgage (s) were used for purchase and or improvement of the property itself, and the debt is under $2million you are liable for 'cancellation of debt' tax. Similarly, you will liable for tax on "Phantom Income" of the difference between the total debt incurred and the short sale payoff over $250,000 even if the home is your primary residence and you didn't take out an equity line to buy a Porsche.

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