Bankruptcy, Foreclosure & Credit

Homeowners who had bought their house using "teaser loans" (highly discounted initial payments), or by paying a down payment less than fifteen percent of the cost price or other traditional loans that allow minimal down payment, are the ones who top the defaulters' list. First time homebuyers are often the victims of foreclosures who have little knowledge about how the mortgage market operates. Lured by the low initial interest rates, they fail to read the fine print. The sub-prime borrowers are also another category of borrowers that find their homes in foreclosure situations due to the imbalance in their debt to income ratio. In order to stop a foreclosure many choose to file bankruptcy when they feel there's no other way out.

Bankruptcy comes with a whole set of disadvantages that makes it a very unappealing choice no matter how difficult circumstances are. For filing bankruptcy, you need to divulge a great deal of financial as well as personal information that typically includes family earnings, debts, and assets. While debt listings include revolving credit, personal loans, mortgage, and any other form of debt, other questions pertaining to your spending habits will also be asked. Having a "bankrupt" tag attached with your name can be extremely shameful and agonizing. Bankruptcy is governed by federal laws, and in order to decide the type of bankruptcy to be filed, you need to consult an attorney. If you opt for Chapter 7, you will have to surrender all non-exempt property to your creditors in exchange for releasing you from debts. One thing you must know here is that you can't escape certain financial liabilities and child support, taxes, car loans, and mortgages still need to be paid in full. Thus, you will have to continue making mortgage payments if you do not want the fear of losing your home and equity nagging you all the time. Simply put, bankruptcy has its own limitations and gives you only a fresh start, as in spite of getting rid of debts such as unsecured debt, medical debts; other substantial loans still remain to be settled.

Alternatively, you can choose Chapter 13 that allows you to repay all or part of your debts over time, and you need to do this under the supervision of a court appointed trustee. The time frame is usually three to five years and you can keep your property after you make payments as agreed. In addition, you are discharged from the portion of the debts that you did not settle.

Bankruptcy also wrecks your credit report, as it stays on your credit report for up to ten years from the time the case was filed. Your credit score is seriously affected and will not make you eligible for credit from traditional banks and financial institutions. Subprime lenders may consider your loan application however the interest rates are bound to be very high. No matter which bankruptcy plan you choose, it's important to know that filing for a bankruptcy is not as easy as it seems to be.