4/25/2014

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FORECLOSURE AND YOUR CREDIT
by John M. Roberts

A foreclosure is probably the most damaging of all credit missteps.

Foreclosure is a process in which a bank is given legal authority to recover what is owed on a property by selling it to satisfy unpaid mortgage payments and liens against the property.

Your credit rating suffers substantially when you have a property that the lender has to take back in a foreclosure action, although by the time the lender even starts foreclose proceedings, your credit score will have already been hurt due to delinquent payments.

A foreclosure is probably the most damaging of all credit missteps because of the dollar amounts involved. Although a vehicle repossession, bad credit card debt, and/or the failure to pay other bills all have negative effects on your credit history, the foreclosure on real estate has the most negative impact.

Most people who lose their homes and/or other property to foreclosure know and understand that their credit is taking a beating, and it's not uncommon to see credit scores drop dramatically within a three to four month period.

No one intentionally loses their home, but foreclosures happen more often than you might think, especially during times of economic recession. They happen due to any number of issues, such as the loss of a job, high adjustable interest rates, divorce, death of a spouse, workplace injuries, and other unforeseen circumstances.

Many people file bankruptcy to stop foreclosure proceedings and buy time to reorganize their finances. Although a bankruptcy will hurt a credit rating, too, it is easier to rebound from a bankruptcy than from a foreclosure.

But beware, filing for bankruptcy does not automatically mean that you will keep your home, and it does not protect your credit rating. You have to prove that you will be able to continue making your house payments, and the payments that you did not make, called arrears, has to be paid too.

This is done by formulating a plan that has to be approved by the courts. If you don't follow the plan, your bank may go back to court and have your plan dismissed, thereby asking the courts to allow the bank the right to continue with the foreclosure process.

Once the bankruptcy has been granted, whether it is a chapter 13 or chapter 7, if you follow the plan to it's completion, which usually takes up 7 years, you may actually be able to obtain more credit during the years that you are in the bankruptcy plan.

Although your credit rating is diminished, it can be repaired. Certain credit card companies may still offer you credit cards while you are in bankruptcy, providing you stay on the plan and make your payments as agreed. This will help your credit immensely and put you back on the road to reestablishing a good credit rating.

In the world of finance and economics, your credit score is the most important asset you have. Once your credit is damaged due to a foreclosure, it will take many years to redeem it.

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