Is it true that my credit takes a bigger hit if I file for bankruptcy than if I have to undergo a foreclosure?

Common Myths Related to Bankruptcy, Modification, and Foreclosure

The processes surrounding bankruptcy, loan modification and foreclosure in Miami are often complicated, resulting in several misunderstandings about how these processes work and which one you should pursue if you are facing distressing financial situations.  These common myths make it difficult to make the right decision for your financial future, so dispelling them and learning the truth about which process would work in your favor if you are considering bankruptcy in Florida is an important step to getting back on track with your life and financial goals.

Myth #1 – Loan modification is encouraged by the federal government and therefore anyone can easily get it to reduce the principal amount that’s owed on their home.

Wrong.

Less than 30% of the homeowners who apply for loan modifications are granted them.  Additionally, it’s not an easy process and can take many months to complete and there is no guarantee that the lender will reduce the principal amount on the mortgage.  You may have gone through the whole process merely to have your loan extended to 40 years and the interest rate temporarily reduced, not getting you any closer to paying off your home.

Myth #2 – If I apply for a modification, my house won’t go into foreclosure and my missed payments will be waived.

Wrong.

If the foreclosure process has already been started on your home, or is close to being started, applying for a loan modification will not stop this process.  At best, it might slow it down or postpone the sale date slightly, but there’s no guarantee.  Also, a loan modification will not waive your missed payments.  Most lenders simply add these missed payments on to the end of your loan terms. 

Myth #3 – My credit takes a bigger hit if I file for bankruptcy than if I have to undergo a foreclosure. 

Wrong.

Many people find that their credit score actually improves after bankruptcy, especially if they’ve been missing payments for a while on multiple accounts.  If you have a foreclosure on your credit, it will take a serious hit—often one that is more serious than bankruptcy causes. A Miami bankruptcy attorney will be able to look at your specific circumstances and help you determine if a bankruptcy will help you achieve better credit in the short-term and long-term.   

Should I be worried about the Mortgage Debt Relief Act expiring at the end of this year (2012)?

Expiration of the Mortgage Debt Relief Act – Should I be Worried?

The Mortgage Debt Relief Act of 2007 is set to expire at the end of 2012 and many Florida homeowners facing foreclosure are concerned about the effects this will have on their situation.  However, before you stress too much, there are several points you should know about this Act and how it can affect you.

First, you need to know a little about how foreclosures and deficiencies related to them work.  Let’s say you’re one of the many Florida homeowners who owe more on your home than the current value of the home.  If your mortgage is for $250,000 but your home is currently valued at $150,000, the $100,000 difference is the deficiency that would still be owed to your lender—even if your home goes into foreclosure.  For many people, this deficiency is money that the lender would still be able to collect on.  Not only would you lose your home, but the lender would also be able to collect on the $100,000 deficiency, even after foreclosing on your home and forcing you to seek for another place to live. 

However, many lenders are offering forgiveness of the debt that would otherwise be considered the deficiency on your mortgage, especially if it means getting you out of the home so they can attempt to resell it.  The problem with this is according to federal tax code, that forgiven debt is considered to be income for you and is taxed as such.  This means that even if the lender forgives the deficiency you would otherwise owe on the mortgage after the foreclosure, you could still be taxed for the entire amount.  For some people, this is a very high amount! 

The Mortgage Debt Relief Act of 2007 provides relief to people who were granted forgiveness of deficiencies by their lender, stating that they are no longer responsible paying taxes on them, so it’s a very real concern for many people facing foreclosure as to whether or not this Act will be extended past 2012.  However, since it has already been extended and this is an election year, it is highly likely that it will be extended again.  Even if it’s not, one way of avoiding that potentially huge tax liability is to just file bankruptcy. Either way, talk to a qualified foreclosure or bankruptcy attorney to review your options.