A short sale is least onerous

Q:

I read with interest your recent article comparing the damage a foreclosure can do to your credit rating compared to a short sale. What about a bankruptcy compared to a foreclosure? Which one is better?

A:

I don’t think there is a “better” here. Your question sounds more like a race to the bottom, and no one wins this race.

A foreclosure would torpedo a person’s credit rating by about as much as a bankruptcy - six of one, half dozen of the other.

When faced with foreclosure, some individuals turn to bankruptcy instead. In some cases, filing for bankruptcy can be a little less damaging to a person’s credit profile than a foreclosure.

Filing for bankruptcy will consolidate your debt and can wipe out your liabilities but will not prevent eventual foreclosure if the lender has already started the process. Bankruptcy only delays foreclosure. The property will eventually foreclose which would also negatively affect the values of neighboring properties.

If your home and mortgage payment is what is creating your financial hardship, a short sale is probably a better alternative to either a foreclosure or bankruptcy.

A short sale will be reported as settled debt versus having to go the bankruptcy or foreclosure route and will be far less damaging to your credit report in the future.

Although you can conduct a short sale while in bankruptcy, it is difficult and requires a strategy. You would need to consult with a bankruptcy attorney before attempting this route.

Very simply, a short sale is when a lender agrees to take less than the amount owed to it and allows homeowners to sell the property because of financial hardship.

Usually, the owner’s mortgage is worth more than the home, and the owner is having difficulty making his/her payments. The owner sells the home, and the lender marks down the value of the mortgage to the sales price, leaving the owner free and clear.

If your home is your biggest financial problem, a short sale is a much better alternative than either foreclosure or bankruptcy.