What's "better" ... bankruptcy or foreclosure?

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The thing about short selling is you're doing it because you don't have money to bring to the table. You are "short" from what the buyer will pay and what's left on the loan. See what you can work out with the lender, but don't feel as if you have a moral obligation to pay everything back.

Sometimes, you just can't. Businesses do it all the time. Donald Trump has done it several times. Heck, even Greece is doing it with the approval of the EU.

What other debt do you have? If you have a ton of debt from your health problems and credit card debt racked up to keep you afloat, bankruptcy is probably the better alternative.

Take Ragu's advice and talk to a lawyer or debt counselor (and not one of those debt counseling places advertising on TV.)

 

Definitely don't count out a short sale. In fact, do it. The job loss alone is hardship enough to prove it. The credit hit is still there, but it's on your record for less time than a true foreclosure. Are you having a hard time selling now because you're asking too much or because no one is buying where you live? If you are asking too much, try to sell the house for whatever the market bears and then go through the process with the bank. The process can be a pain but it's worth a try.

If you don't have a ton of other debt or issues and are up to date on your other bills and the house is the main issue, a foreclosure isn't the end of the world either. Your credit will start improving fairly quickly as long as all your other obligations are up to date, and even though you won't be able to buy a house right away it doesn't sound like that's an option in the near future anyway. I'd make sure by talking to a lawyer that there is little chance of the bank coming after you based on your state's laws.

Still, if the house is the main issue try a short sale first.

 

Do be aware that if the bank does forgive the balance after a short sale, the IRS considers that taxable income. But it still could be the best choice.

 

DO NOT under any circumstances whatsoever get behind on your credit cards. Call them, tell them the situation, offer a forbearance or even paying $5-10 a month as a good faith gesture.

Cleaning up your credit after the fact can be a nightmare. I had to because of the recession, but I cleaned mine up entirely and got my credit score to rise to almost 800. Hard lessons to learn.

 

I am not sure about this whole deal either, but I recall reading quite a bit in 2008-09 about how a foreclosure is not going to be looked upon as a catastrophic event for the next few years. It's so common -- especially depending on what area of the country you're living in -- that it really doesn't imply as much about the person as it once did. Also, the chance of you being able to buy a home in the next seven years is going to be pretty low anyway just because of your own financial situation.

 

FWIW I know of a family that has not made a mortgage payment on their McMansion in over 2 years in the central part of Florida and the bank never evicted them from the house. I think they thought it better to have someone living in it than someone who would potentially ransack it on the way out.

If you are going to get foreclosed at least you may not have to pay rent or mortgage for a while.

 

True dat. Happens out here in California all the time. The one common trick is to demand that they prove they own the loan, which they don't because of the way it has been chopped up. Won't be forever but you can probably buy yourself a good number of months of rent-free living.

 

There is a law on the books right now that I think goes through the end of this year that the tax is forgiven for a foreclosure or short sale but another thing to do research on or ask an attorney about just to make sure.

 

Definitely ask about a short sale, or failing that a deed-in-lieu. It's not a great option, but it doesn't impact your credit the way a formal foreclosure will, and if you're down to losing the house anyway it's another avenue.

 

If you are worried about your credit rating for financial aid or a masters, it only comes into play for private loans or PLUS loans. You qualify for financial aid as long as you aren't in default.

I'd think about starting grad school ASAP.

As for the health care bills, what a country we live in when a medical issue can put someone in a lot of debt.