bankruptcy

You probably know by now that completing a short sale is much, much better then giving up and quitting and letting the bank take the home via foreclosure.  You probably also know that although, much better than a foreclosure, the short sale will affect your credit.

What you probably don’t know is that in most cases a deed-in-lieu of foreclosure and a loan modification will as well.

Your loan modification (depending on the type) is essentially a settlement or restructuring of debt.  Ever see those debt consolidator commercials that say, “no bankruptcy needed?”  Just like a loan modification (which you can do yourself) you could do this with your creditors as well, as in you could negotiate a lower payoff or better terms with your creditors.

The catch is that there’s usually some damage to your credit involved.   This information comes straight from Wells Fargo, who told a client the other day that this modification would be recorded and adversely affect their credit.

The same can be said of a deed-in-lieu where you are basically settling or agreeing NOT to pay the debt.

To understand why this happens you have to refer over to the pie chart and see how it “hits” your credit.

See the largest part of the pie?  35% to payments?  Keep in mind that 99.9% of the time you will not qualify for any of these things without missing a payment, so that’s damage number 1.

The second part of this is settling which is like missing one big payment or all of the remainder payments.  It’s kind of like dropping an atom bomb on your credit. Depending on how this is recorded it could very well stay on your credit for 5 years or more.

Finally, there’s the issue of forgiveness of the debt in the case of the deed-in-lieu that could result in a collections account being opened.

We understand that everything is going crazy right now, but if you keep your wits about you, you can often avoid some damaging things and come out better in the end.

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