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What’s worse for credit score — foreclosure, short sale or deed in lieu?
I am often asked this very question. I came across this article published in the Washington Post. One writers opinion but shared by many in the industry….. Lorene
By Michelle Singletary,August 30, 2011
Washington Post – Business
You can’t really say that credit scores don’t matter. They do.
So it’s understandable that the hundreds of thousands of homeowners who finally realize they can no longer hold onto their homes worry about how turning in their keys to the house through various transactions with their lender will affect their credit scores.
People can just let the home go to foreclosure, and this will affect their scores for seven years. Or they can do a deed in lieu of foreclosure. With a deed in lieu, you voluntarily give your home to the lender in exchange for the cancellation of your loan. This, too, can create a negative mark on your credit history.
Homeowners can also get out from under a mortgage by doing a short sale, in which the lender allows the borrower to sell the house for less than what is owed. A short sale is also bad for your credit.
RealtyTrac recently reported that pre-foreclosure transactions, which often include short sales, jumped 19 percent between the first and second quarter of this year. Short sales accounted for 12 percent of all housing sales in the second quarter, up from 10 percent for the same period last year.
But is there a pecking order in which the ubiquitous credit scoring system treats a short sale more favorably than a foreclosure or a deed in lieu of foreclosure?
I get this question quite often these days. Homeowners have been led to believe that because foreclosure is so devastating to their credit scores, almost anything else is better.
This is not true — turns out there’s no significant difference in FICO score impact among foreclosures, short sales or deeds in lieu of foreclosure, said Bradley Graham, senior director of scores product management at FICO, which is the trademark credit scoring model created by Fair Isaac Corp. It’s the most widely used scoring system in the country.
“All of those events represent a loan default and as such are highly predictive of future credit risk,” Graham wrote in an e-mail.
If you apply for a loan in the future, certain lenders may look more favorably at a short sale than at a foreclosure, but the credit scoring system sees all these defaults as equally bad. Graham said that based on the analysis of the information that lenders share with credit bureaus about those forms of mortgage default, they have about the same weight when determining future risk.
There are two caveats in what lenders report to the credit bureaus, Graham said. The negative impact of a foreclosure, short sale or deed in lieu of foreclosure can be slightly less if the lender does not report a deficiency balance. A deficiency balance is the amount one may owe the bank after a property is sold.
Here’s something interesting: The FICO analysis found that the higher your original score, the greater the drop and the longer it will take for your credit to recover to the same level assuming all else held constant. A consumer who started with a 780 score and did a short sale with no deficiency balance could see his score drop to a range of 655 to 675. The FICO scale goes from a low of 300 to a high of 850. A consumer who started with a score of 680 could see a drop to a range of 610 to 630.
For the consumer with the original 780 score, it could take seven years to get back to that level. But at 680, it could take just three years.
So how would a loan modification affect your score?
Credit reports show limited information about mortgages, such as balance, date opened, payment history and current status. The information reported does not show loan terms such as interest rate, monthly payment or number of months remaining on the loan. If a mortgage modification changes only the interest rate, the years remaining on the loan and/or the amount of the borrower’s monthly payment, those changes will not be reflected on the credit report and can’t affect the person’s credit score, Graham said.
At least now you know that if you decide you can’t keep your house, you don’t have to fret that one way to turn in your keys is far worse than the other. So just weigh what’s best for your overall situation and not only the impact to your credit score, Graham said. “The FICO score is only one part of anyone’s credit profile and reputation.”
The Bankruptcy Evening – March 12th & 14th, 2013 at The Temecula Public Library
On Tuesday March 12th and Thursday March 14th, 2013 at 7:00 p.m. at the Temecula Public Library on Pauba Road in Temecula. Lorene will be presenting another “Bankruptcy Evening”. As always she will be covering the basics of bankruptcy, focusing on Chapter 7 and Chapter 13. How each chapter works and the advantages of bankruptcy over debt settlement or debt consolidation programs. assist you in keeping your home. If you are facing foreclosure or have a second mortgage that is not supported by $1.00 in equity you don’t want to miss this evening. This free educational seminar is packed with all the information you need to make an informed decision whether or not bankruptcy would be right for you and your family. Bankruptcy may be the best investment you make in 2013.
What will be covered:
- The Means Test
- Chapter 7 – Advantages and Disadvantages
- Chapter 13 – How to get rid of your second mortgage!
- Debt management and settlement programs
- Your Property – Do you get to keep your stuff!
- Credit rating after bankruptcy
- Short sale vs. foreclosure
- Bankruptcy and your employment
- Credit recovery after bankruptcy
What attendees had to say after past Bankruptcy Evenings :
Attendees were given a seminar evaluation sheet and asked to grade the evening on 6 different criteria on a 1 to 5 scale from 1 being disagree to 5 being agree.
“exceeded expectations, KM 5s on all criteria”
“thank you, this meeting has already put me at ease, PM 5s on all criteria”
“the new legislation was good information, KG 5s on all criteria”
“very informative, MJ 5s on all criteria”
“this was well worth the time spent to learn about chapter 7 / 13. Thank you for giving up your evening to educate us tonight, AC 5s on all criteria”
Come see and hear for yourself!
Elder Bankruptcy Filings: Capacity Issues
Note: This article was originally published in the June 2012 issue of the Riverside Lawyer Magazine. The authors are Peter C. Anderson, United States Trustee for Central District Court Riverside Division and Abram S. Feuerstein, Asst. United States Trustee. Reprinted with permission of authors and the Riverside County Bar Association.
This article outlines the procedure that can allow a family member or friend to file bankruptcy on behalf of a person suffering from dementia or Alzheimer or other mental incapacity.
Older Americans are filing for bankruptcy at increasing rates.1 And as the age of the average bankruptcy debtor increases, it appears that there is an increase in the number of debtors filing bankruptcy who have chronic and disabling medical conditions. Some of these individuals may lack the physical capacity to undertake those actions necessary to complete a bankruptcy filing successfully and obtain a bankruptcy discharge of their debts. Others may lack the mental capacity or competency to make financial decisions. Inevitably, there has been a rise in situations involving family members seeking to file bankruptcy cases for incapacitated relatives.
Unfortunately, some aspects of the law in this area are unsettled and not well-developed. All too frequently, well- meaning relatives attempt to file bankruptcy cases for incapacitated, financially distressed family members in a hap- hazard, improper fashion. Often, they run to the bankruptcy court armed only with a doctor’s note attesting to the poor physical health or mental condition of their family member. Other individuals run to a local stationery store or look on the internet for a fill-in-the-blanks power of attorney form to support a bankruptcy filing. At times, family members risk committing bankruptcy crimes by forging documents and making false statements as they attempt to commence a bankruptcy case for a disabled or incompetent relative. Even experienced bankruptcy lawyers lack familiarity with the rules.
Incapacitated Debtors
The first question is whether incapacitated individuals can file bankruptcy. The short answer is, “Yes.” The Bankruptcy Code contemplates that incapacitated individu- als may be bankruptcy debtors, and courts agree.2
Under Section 301 of the Bankruptcy Code,3 a voluntary bankruptcy case may be commenced only when an individual who may be a debtor files a bankruptcy petition. In turn, Section 109 states who may be a debtor. And that section contains no restrictions on incapacitated or disabled debtors.4
Filing Through a Representative or Next Friend
Given that disabled and incapacitated debtors may file bankruptcy, the next question that arises is who, if anyone, has the authority to file a bankruptcy petition on behalf of a debtor who lacks capacity. In answering this question, the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure provide only limited guidance.
Under Rule 1004.1, “[i]f an infant or incompetent per- son has a representative, including a general guardian, committee, conservator, or similar fiduciary, the representative may file a bankruptcy petition on behalf of the infant or incompetent person.”
Rule 1004.1 also provides that if an infant or incompetent person does not have a duly appointed representative, the person “may file a voluntary petition by next friend or guardian ad litem. The court shall appoint a guardian ad litem for an infant or incompetent person who is a debtor and is not otherwise represented or shall make any other order to protect the infant or incompetent debtor.”
Hence, to the extent that a bankruptcy petition is filed by a representative on behalf of an infant or an incompetent person, sound practice dictates that counsel should ensure that appropriate documentation is filed with the petition establishing the representative’s authority to file the petition. However, if no representative exists, the parties should follow Rule 1004.1 and seek an immediate court order appointing a guardian or a next friend.
Powers of Attorney
Other than the procedures outlined in Rule
1004.1 pertaining to “infants” and “incompetent persons,” the Bankruptcy Code is silent as to whether someone can file a bankruptcy case on behalf of another person. Thus, at least one court has taken a very restrictive view and held that, except as allowed by Rule 1004.1, a person may never file a voluntary case on behalf of another individual.6
By contrast, there are a range of bankruptcy decisions that authorize bankruptcy filings through the use of powers of attorney. Some of these decisions permit a petition to be filed pursuant to a broad, generic grant of authority contained in a power of attorney.7 Other cases prohibit a bankruptcy filing absent a specific, express provision that enumerates a bankruptcy filing as part of the authority conveyed under the power of attorney.8 A third group of cases takes a middle approach as to the necessary language in the power of attorney.9
Regardless of how a specific court will rule, practitioners must understand that bankruptcy courts are reluctant to permit a party other than the debtor to sign and file a petition under a power of attorney. As one court noted, “[t]he filing of a bankruptcy petition is a serious act which necessarily involves exposing the financial and legal affairs of the petitioner to all interested parties in a public forum.”10 Given its profound legal consequences, another court has observed, filing bankruptcy “should not be undertaken without careful deliberation.”11
Moreover, the bankruptcy process contemplates complete and accurate disclosure about a debtor’s financial condition – both in written bankruptcy schedules and statements, and in oral testimony at a meeting of creditors.12 Typically, this information is available only from the debtor personally. And absent extraordinary circumstances, creditors have the right to demand the personal participation of the debtor in bankruptcy proceedings as a condition of the debtor obtaining a discharge.
In sum, filing a bankruptcy case is among the most important finan- cial decisions a person will make during his or her lifetime. In light of the lack of clarity concerning the use of powers of attorney, the heightened importance of financial disclosure in bankruptcy cases, and the legal con- sequences of filing bankruptcy, attorneys should proceed very cautiously before advising clients to sign a bankruptcy petition for another person using a power of attorney. And in those extremely rare cases when a power of attorney is used, attorneys should check the language of the instrument to ensure that it authorizes a bankruptcy filing.
1 See generally, J. Golmant and J. Woods, “Aging and Bankruptcy Revisited,” American Bankruptcy Institute Journal (Sept. 2010); J. Pottow, The Rise in Elder Bankruptcy Filings and Failure of U.S. Bankruptcy Law, 19 Elder L.J. 119 (2011).
2 In re Myers, 350 B.R. 760, 762-3 (Bankr. N.D. Ohio 2006)
(collecting cases).
3 Unless otherwise noted, all statutory references are to the Bankruptcy Code, Title 11, United States Code, and rule references are to the Federal Rules of Bankruptcy Procedure.
4 In fact, Section 109 supports the filing of bankruptcy by incapacitated and/or disabled persons. Most non-bankruptcy lawyers are generally aware that in 2005, Congress enacted substantial measures to reform the nation’s bankruptcy laws.
As part of these wide-ranging amendments, Congress enacted educational requirements for bankruptcy debtors. These mandate that debtors take a pre-bankruptcy credit counseling class, and, as a condition of receiving a bankruptcy discharge, debtors are required to take a financial management course after they file bankruptcy.
Under Section 109(h)(4), incapacitated or disabled debtors are specifically exempted from meeting the pre-bankruptcy educational requirement. Similarly, the discharge provisions of the Bankruptcy Code exempt incapacitated debtors from the requirement of completing a post-filing course. These provisions manifest a Congressional awareness that incapacitated persons could indeed be bankruptcy debtors, and Congress went the extra step of excluding such debtors from the newly enacted educational requirements.
5 The representative and/or would-be representative faces another hurdle involving the educational requirements added to the Bankruptcy Code in 2005. The code’s educational requirements may be a nondelegable duty. See, e.g., In re Hammer, 2008 WL 6177312 (Bankr. N.D. Ohio 2008). Instead of taking the class on behalf of a debtor or, worse, pretending that the incompetent debtor took the class and is capable of certifying
that the requirement has been completed, the representative may want to consider filing a motion excusing compliance with the pre- and post-bankruptcy filing educational requirements.
6 In re Vitagliano, 303 B.R. 292, 293 (Bankr.
W.D.N.Y. 2003); see also In re Smith, 115 B.R. 84 (Bankr. E.D.Va. 1990) (authorizing filing through a court-appointed guardian having specific authorization to file bankruptcy, but not a power of attorney).
7 See, e.g., In re Hurt, 234 B.R. 1, 3-4 (Bankr.
D.N.H. 1999).
8 See, e.g., In re Eicholz, 310 B.R. 203, 207 (Bankr.
W.D.Wash. 2004).
9 See, e.g., In re Curtis, 262 B.R. 619, 622 (Bankr.
D.Vt. 2001).
10 In re Brown, 163 B.R. 596, 597 (Bankr. N.D.Fla.
1993).
11 Curtis, supra, 262 B.R. at 624.
12 Section 343 requires a bankruptcy debtor to appear and submit to an examination under oath at a meeting of creditors
Procrastination? Or Are You Just Afraid of The Word Bankruptcy?
Every week I meet with clients who first met with me long ago and suddenly month’s later are in a panic to file bankruptcy because they have been hit with a lawsuit, repossession or a wage garnishment. I can’t tell you how many times I get the call that the sale date on their home is just days away and they are begging to save the house. Or first time callers who just keep hoping it will all get better and back to normal any day now. Procrastination is your worst enemy in bankruptcy. Pre-planning is everything in bankruptcy and can save hours of frustration and lots of money.
You can file an emergency bankruptcy petition fairly quickly but all the supporting documents are due to the court within 2 weeks. The emergency petition many times is a Band-Aid that just falls off in a couple of days leaving you with the same problems as before. It may just be too late. The hole has been dug so deep there is no way to fix it again. Again an emergency filing costs more money and does not guarantee that you will get the result you are seeking. Especially when you have just received notice from your employer that a wage garnishment is pending and 25% of your gross salary will be taken out of your next pay check. I can’t always get the money back.
I have said this many times; “Bankruptcy is not a dirty word”. Bankruptcy is biblically based (Deuteronomy 15:2) and constitutionally protected (Article 1 Section 8 Clause 4 of the United States Constitution). Many famous and well respected people have declared bankruptcy, Abraham Lincoln, Ulysses S Grant, James Monroe… and many others including myself. “Bankruptcy is for the honest but unfortunate debtor facing unforeseen circumstances deserving a fresh start”. Is that you?
Read my blog post titled “Considering Bankruptcy… consider this”. Are you just putting off the inevitable? What are your alternatives? Debt settlement is not a viable alternative. Most debt settlement companies charge more than a bankruptcy attorney and take years trying to resolved your debt. The creditors that are not being paid eventually file lawsuits against you and once again you are in a deep hole. Debt settlement does not provide a fresh start. You will not get credit easily after debt settlement since you still hold the “bankruptcy card” that you can play at any time. When you file bankruptcy you can’t file again in most instances for 8 years.
Bottom line… don’t wait till it is too late to learn whether or not bankruptcy is the right alternative for you and your family. If you have another alternative I will let you know in my free one hour consultation. Or better yet, you can attend one of my educational seminars I present of “Basics of Bankruptcy” at the Temecula Library on Pauba Rd. Click here for the events page to see when my next schedule seminar is taking place and register online or pick up the phone right now and schedule an appointment. 951-894-4791
