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Options for Homeowners When Facing Foreclosure

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During the current mortgage crisis, Americans in numbers not seen since the Great Depression have fallen behind on their mortgage payments. In the first two quarters of 2010, of the roughly 47 million Americans who are paying a mortgage, nearly seven percent, or 3.29 million, are 60 days or more late. And the problem is not just borrowers who are behind; over 11 million residential properties with mortgages were "underwater" or in negative equity. They owe more than their house is worth.

In 2010, it is estimated that four million Americans will face foreclosure. Perhaps you are one of the millions of Americans who are delinquent in your monthly mortgage payments and may even be threatened with foreclosure. And if you have applied for government relief programs such as HAMP and either have been denied a loan modification or the modification is not enough to help, you may feel as though your options are limited. But if you plan carefully, you can get through the process and get on with your life. Others have done it and so can you. Here are some strategies to consider.

Short Sale

If you are falling behind in your mortgage payments, contact your bank or loan servicer and discuss your situation. Your lender may negotiate a short sale, which means that the house is sold for less than what you owe and the lender forgives the difference. A short sale will negatively impact your credit rating. The item will remain on your credit report for seven years, but during that time you can work to rebuild your creditworthiness.

Foreclosure

If your lender refuses to consider a short sale, your next choice is to let your lender proceed with a foreclosure. It will take time for the process to move forward and if you are proactive you can prepare your new residence in advance and be gone by the time your lender takes control of your house. Contact your bank and negotiate an eviction date. Depending on the law in your state, you may be able to stay in your house for months beyond the date of foreclosure.

An advantage to foreclosure is that your other assets are untouched. The foreclosure will remain on your credit record for up to ten years, but during that time you can improve your credit score by using credit wisely and always paying on time.

Bankruptcy

Another option is to file bankruptcy in U.S. Bankruptcy Court. Bankruptcy law is very complicated and varies from state to state, so you would be well advised to seek the professional advice of a bankruptcy lawyer.

Chapter 7 bankruptcy basically involves the liquidation of most assets in order to pay your creditors. Generally, Chapter 7 is appropriate for people who have either no income or subsistence income, giving them little chance of sticking to a payment plan. Under Chapter 7, what you are entitled to keep as personal property varies according to your state law.

If you have a steady source of income, you should consider filing Chapter 13. This is a debt-restructuring plan< that creates a payment plan that you follow over a period of several years. If you pay off your debts, the bankruptcy is discharged.

Filing for bankruptcy will stop most collection actions and can postpone a foreclosure. By stopping foreclosure proceedings, under Chapter 13 if you can increase your cash flow you may be able to catch up on delinquent mortgage payments.

How bankruptcy affects your credit rating

A Chapter 13 bankruptcy will negatively impact your credit rating and remain on your record for seven years from the date you file. A Chapter 7 bankruptcy will remain on your credit report for ten years. In either case you can immediately begin to rebuild your credit rating by paying all of your bills on time and using credit wisely.