The impact of foreclosure on your credit score is the most frequently asked question we get. The method of calculating a credit score (FICO Score) is proprietary information. What complicates the issue even further is that all credit information is calculated into the individual's credit score as it is entered by creditors and is only updated whenever there is an inquiry.
The second most asked question is "How soon does the foreclosure go on my credit report?" This depends on the lender but in the vast majority of cases, as soon as the homeowner is 90 days late (30 days in some states), the foreclosure info is filed with the credit reporting agencies. It will not be "reversed" by a short sale or a deed in lieu of foreclosure unless negotiated by the homeowner, and often that doesn't work.
So with the foreclosure question, the homeowner's credit score is first decreased by his late payments. Usually, he is also late on other bills because of his financial crisis and has additional late payments, collections, or even judgments that all lower his credit score. So if he had his credit score of 680 on a specific date before he started his personal financial decline, after he has been served with his foreclosure notice or even after the foreclosure is completed; his new score could be 420 or lower.
He is usually shocked and dismayed, but the real problem is how much more interest the lenders want because of his low credit score. For example, an auto loan could cost a "D" credit customer as much as $13,000 more for the same car as the "A" credit buyer! The "D" credit person is penalized for his credit situation since the collateral is the same.
The foreclosure's actual point impact on an individual's credit report has recently gotten somewhat higher and is estimated to be from 125 to 175 points. The bigger impact is from the late payments on other bills which continue to mount up further reducing his credit score.. The net effect is generally considered to be about a 240 - 260 point decline counting his late mortgage payments. Ironically, the lower your credit score to start, the less the impact of additional late payments, and if you get into the 400's, it's really hard to get much lower without almost trying to hurt yourself. Many of the items on any credit report can be removed over time. It requires persistence and it's estimated that 30% of all items on credit reports are incorrect and can be removed just by an inquiry or showing a paid invoice. Also the credit score reduction for the foreclosure is reduced as time goes on, until it settles at a minimal deduction (50 to 75 points) after a few years.
It is absolutely untrue that once you have had a foreclosure you can never buy a home again, as we see people buying a new home within a year of losing theirs to foreclosure. There are even homeowners who legally buy homes within 30 days of their foreclosure using legal techniques with no cash and no credit.
Foreclosure victims, who want to do conventional financing in the future, will have to pay a higher interest rate (approximately 1 and a half to 2%) unless their down payment could be 10% to 20% of the purchase price. This sizable down payment can often be obtained from friends or family members and carried as a second mortgage or second deed of trust on the property.
I am often asked if doing a "Deed in Lieu of Foreclosure" or a "Short Sale" with the lender reports the same as a foreclosure. Unfortunately, depending on how the lender reports your foreclosure, it could stay on your report even if the lender accepts your deed to resolve the foreclosure. The foreclosure action does not have to be filed in the courts to be considered a "foreclosure" by the lender. If your lender accepts a "Deed in Lieu Of Foreclosure" or a "Short Sale", always them ask for a letter explaining they have accepted your deed in exchange for your home, and that they will retract or not put a foreclosure notification in your credit record. If they tell you they have to, it's not true, ask for a Supervisor until you get your letter.
Bankruptcy legislation under US law was first introduced in 1898, by the enactment of The Bankruptcy Act. Thereafter, from time to time, there have been many acts and amendments to laws on bankruptcy in response to commercial and socio-economic demands. Petitions for bankruptcy, filed under chapters 7, 11 or 13 Bankruptcy have different implications.
By filing for a bankruptcy petition under Chapter 7, the petitioner hands himself to the protection of the court. It implies that the petitioner has no hope of ever being able to repay back his debts. The end result is a complete liquidation of the petitioner's assets through a court appointed trustee, subject to exemptions, by way of sale to payback the creditors. Thereafter, the debtor is discharged from his debts. The advantage here is that the court intervenes and prevents creditors from harassing you and makes sure that the debtor is not turned into a destitute after the liquidation of the assets, by exempting certain assets as cannot be attached or liquidated in course of bankruptcy proceeding. However, there are certain obligations and debts that are beyond the scope of that which can be discharged.
The exemptions are fully described in 11 United States Code Section 522.
Petitions filed under Chapter 13 are for unsecured debts under $25000 and secured debts under $750000. The debtor is allowed to restructure interest free debt repayments over a period of three to five years, under a new repayment schedule. The repayments are made to a trustee who appropriates the repayment against secured and unsecured debts, as per directions of the court. Creditor approval is not required and if the creditor(s) object to the reorganized repayment schedule, the court can force acceptance. The debtor's assets are not categorized as under liquidation although the trustee has control over the finances.
Bankruptcy petitions under Chapter 11 are nearly always filed by businesses, since the limit for filing under this chapter is $2,000,000 and above for secured loans and unsecured loans cumulatively. Though, individuals may also file if the amount falls within these limits. This chapter also envisages a reorganization plan that may have a schedule up to six years. The business continues to run, preserving assets and jobs and the debt is restructured to enable repayment to be made from future profits, recapitalization, mergers or sale of some assets.
Foreclosure
After a bankruptcy petition has been filed, no action for foreclosure can be taken, if proceedings have already been initiated. Neither can someone be evicted if he has filed a bankruptcy petition. However, it is open to the lender to appear before the bankruptcy court to lift the stay, so that he may proceed with the eviction. Since it is a general practice for lenders to take action only after a three-month default, the foreclosure proceedings themselves take anywhere between four to nine months, after which the eviction will have to be conducted.
Credit
Any petition filed for bankruptcy has disastrous results for the petitioner credit worthiness. It spoils and ruins his credit. The bankruptcy related information usually remains on the credit report for a period of ten years. Availing of credit will be difficult and even if you are able to avail credit at a future date, it will be at a much higher interest rate, thereby raising costs.
Both Dave Dinkel & Kris Koonar are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
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