Filing for Bankruptcy
Filing for bankruptcy may help you keep your home or, at least, get you out from under your mortgage. When you file, the foreclosure process is legally stopped (called an "automatic stay"). It can't be reopened until your bankruptcy case closes or the lender gets court permission to proceed (called "lifting the stay"). For more information, see How Bankruptcy Can Help With Foreclosure.
Selling Your Home
If you simply can't afford the house you own, the above options won't help. You will probably lose your home. But don't wait for your lender to make the first move. If your home has appreciated in value since you bought it, you may be able to sell it yourself. (In fact, real estate investors may show up on your doorstep hoping for a bargain.) Again, contact your lender, who may let you stop making payments until the house is sold.
Ideally, the proceeds from the sale will cover your mortgage and selling costs. But, if they won't, ask your lender to consider accepting what's called a "short sale." That means that the lender accepts the sale proceeds even if they're less than the amount you owe. It's not as easy as it sounds, though. For one thing, lenders are notoriously slow at granting this approval, leaving prospective buyers in limbo. Getting approval is often easiest if you can demonstrate that you or your family has endured some personal hardship (as opposed to having spent foolishly).
Another issue with short sales is that some lenders will keep trying to come after you for the remainder of what you owe. Contact an experienced real estate agent or attorney before proceeding with a short sale.
Handing the Deed Over to the Lender
If no one is interested in buying your house, your lender may agree to take the deed and cancel your debt. This is called a deed in lieu of foreclosure. The idea is that the bank can then sell your house (as with an actual foreclosure) but won't report it as a foreclosure to the credit rating agencies -- in fact, you can negotiate with the bank about how it can help you preserve your credit rating. (To learn more about this option, read Short Sales and Deeds in Lieu of Foreclosure.)
Short sales and deeds in lieu of foreclosure will no longer leave you owing taxes. In the past, the IRS considered forgiven debt to be taxable income. However, this was erased for situations where the loan was for a primary residence by the "Mortgage Forgiveness Debt Relief Act of 2007," or H.R. 3648. For more information, see Canceled Mortgage Debt: What Happens at Tax Time?
For more detailed information on how bankruptcy can help you if you face foreclosure, get Nolo's book Chapter 13 Bankruptcy: Keep Your Property & Repay Debts Over Time, by Stephen R. Elias and Robin Leonard. Also, Solve Your Money Troubles: Debt, Credit & Bankruptcy, by Robin Leonard and Margaret Reiter (Nolo), contains everything you need to know to get out of debt and repair your credit.
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