Foreclosure, bankruptcy not an either/or choice

Filing bankruptcy does not relieve a unpaid lender of the need to foreclose on its collateral to get title to the property.  I’ve encountered a number of clients lately who think that the decision to file bankruptcy will keep a foreclosure off their credit record. Not so.

The end product of bankruptcy is  a discharge of the debtor’s personal responsibility for debts.  Liens generally remain unaffected by a bankruptcy discharge.   While the Chapter 7 debtor must set out his intentions with respect to debts secured by his assets, merely stating that one intends to surrender property does not change legal title to the property.

It is the foreclosure itself that moves title to the property that is the collateral for the debt from the borrower to the buyer at the foreclosure sale.  It is missing payments that lowers credit scores, regardless of how the property ultimately changes hands.

So, filing bankruptcy may delay a foreclosure and eliminate any issues of deficiency judgments or liability to cut off junior lien holders; it is not a substitute for a foreclosure.

Once I’ve explained that, I then need to attack the mindset that wants to gauge alternate strategies by starting with their impact on future credit.  A woman’s work is never done<g>.

Related posts:

1. Can Chapter 7 Debtor Who Did Not Reaffirm Mortgage Walk Away Without Penalty After Discharge?
2. Foreclosure Sale May Not End Financial Liability
3. Protect yourself prior to foreclosure