Saturday, December 19, 2009

Which is most embarrassing: Loan Modification, Short Sale, Foreclosure or Bankruptcy?

Most of my recent seller clients have been very concerned about what their neighbors and friends will think about their financial distress. Everybody wants to be able to pay their bills. Nobody wants to lose their home. Going through financial trouble is not fun.

Because it is embarrassing to go through financial trouble most people wait too long before reaching out for help. They burn through their savings and max out their credit cards and hope things will turn around soon. Waiting can hurt you. If you make the right decisions early on it will save you money and aggravation.

My advice is if you have a financial hardship to speak to a qualified professional that specializes in this area and can intelligently explain your options. Start with a Real Estate Broker because their advice is free, but you should also talk to an attorney and accountant. Make sure they specialize in foreclosure, bankruptcy, loan modification and short sale. If you are in Fairfield County CT I can refer you to several excellent attorneys and accountants.

I mention 4 situations in the headline all of which can be embarrassing. A loan modification would probably have the least affect on your personal life. Nobody would have to know about it except you and the bank. The only way the public would find out is if you got too far behind on your mortgage payments and a foreclosure action was started. A loan modification can be a great solution if your hardship is relatively small and you will recover quickly. Most banks are making pretty mild concessions if any. If you qualify you can probably get your interest rate lowered for a few years.

A Short Sale could potentially be embarrassing depending on where and how you live and how your property is advertised for sale. With a short sale you always maintain ownership of your home and you are the ultimate seller. The bank will need to agree to take less than they are owed, but you will be the person transferring title to the new owner. If you live in a small community where gossip moves quickly than people will probably find out that you are doing a short sale. If you get too far behind on your mortgage than a foreclosure action will probably start which is part of the public record. You will have to decide if the benefits out weigh the embarrassment. Click here to learn more about short selling your home.

Foreclosure is probably the most embarrassing and provides the least benefits. It is almost as bad for your credit as going bankrupt and provides almost none of the benefits. If your home will have a foreclosure auction then a sign advertising the auction legally must stay in your front yard and it will be published in the newspaper. As soon as the foreclosure is filed it becomes public record and people can see it online and by going to the court house. The one benefit of foreclosure is that you will get out from under the mortgage, but the bank can still pursue you for any shortfall. They can collect from you through wage garnishment or tapping your bank account for up to 6 years.

Bankruptcy is obviously embarrassing. It is public record so anybody looking can find out, but it isn't widely publicized. The benefit is all or most of your debts will be discharged. So if other debts besides your mortgage were causing the most damage it may be possible to save your house and reinstate the mortgage and even potentially modify it. The down side is your credit is affected negatively for 7 years. If you keep your house though you may not need your credit and most of your friends and neighbors may not find out.

Every situation is different and it makes sense to talk to professionals that know all of these options well and can explain all of the benefits and issues. The sooner you get advice the better. There are steps you can take early on that will save you money and aggravation.

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