The Consequences of Foreclosure
who is not able to reinstate their loan has two options. They have the option of selling the property to a foreclosure investor cheaply. If this happens, the majority of the equity is lost.
The other option is losing the home to a foreclosure sale. The owner will get no equity in this situation as well. Credit problems are another consequence of foreclosure. If a home goes into foreclosure, that can cause a lot of damage to a homeowners credit rating. The foreclosure is recorded and will stay on the individual’s credit report for several years. If a person has a bad credit rating than this will make any future lending nearly impossible to get. The price of any borrowing that is done in the future will be high because lenders will charge high interest rates. Many years of expensive and limited credit is a consequence of foreclosure over the long term. This means that the complete cost of foreclosure is high and recovering financially very hard. A foreclosure will cause the title of a property to be transferred and a tax assessment will occur. If a homeowner has equity loans against the appreciation of the property and the loans are not repaid, it is considered profit taking.
These types of loans can be taxed and the homeowner has to deal with any taxes that can be due on the profit. The majority of property owners don’t realize that they can cause a tax assessment when the home is lost in a foreclosure. Often when a property is a foreclosed home on the security on a junior lien lender is canceled. However, when that security is lost, lenders can force collection action through the court system. Debt collection of this type causes serious financial problems. If an individual files bankruptcy as a result of a foreclosure, there are consequences for this as well. Bankruptcy is typically the last resort for homeowners. Bankruptcy means the homeowner has used up all other means to try to find a solution but none of them have worked.
It is important to know the types of foreclosure that can be filed and the consequences of each. A homeowner can file a Chapter 7 or Chapter 13. A Chapter 7 filing calls for the debtor to give up all property that is non-exempt to benefit creditors. When this occurs, all debt is discharged. However, car loans, taxes, and home mortgages have to be paid back in full.
A person can still lose their home and any equity they have build up in it if the mortgage payments have not been paid. Chapter 7 relieves the individual of medical debt, credit card debt, and unsecured debt but major debts still have to be paid. When a Chapter 13 is filed, the person who is in debt attempts to repay most of their debt over a certain time period. They are supervised by a court appointed trustee. If a payment plan is approved and payments are kept up, the individual gets to keep their property and are released from a portion of debts they could not pay.
It is important to remember that there are laws now in place that make it harder to pursue this course of action to avoid foreclosure.