In all the arguments over the proposal to allow bankruptcy judges to modify home loans, a.k.a. the bankruptcy “cramdown,” we seem to be losing sight of some simple basics involving foreclosure, bankruptcy and credit.
The Obama administration and certain members of Congress argue that one of the ways to keep more troubled borrowers in their homes would be to add mortgage modification to the tools a bankruptcy judge can use. Right now they can only change the terms of mortgages on second homes.
Yes, it would allow those filing for bankruptcy to keep their homes. A judge could lower mortgage payments by lowering the interest rate or forgiving principal. But at what cost to the borrower’s financial future.
“You get to keep the house, but then again, when you go into bankruptcy, it’s going to affect all your other debt: credit card debt, auto finance debt, when you try to get a new credit card or a new auto loan, or student loan. That’s going to stay with you for quite a long time,” explains Barrett Burns, President and CEO of VantageScore Solutions.
A bankruptcy will stay on your credit rating for a decade. A foreclosure, on the other hand, is much less of a credit hit and goes away after a few years of being responsible with your other debt.
The Administration wants, it seems, first and foremost to keep Americans in their homes. I certainly understand why. The flood of foreclosures is taking not only a human toll, but a huge toll on the housing market and the wider economy. Without stemming foreclosures, neither will recover quickly. But is bankruptcy the answer? Is it throwing the borrower under a bus for the greater good? At some point you have to ask if keeping a house is really worth destroying your financial future for a good long time?
Some of you may argue that a foreclosure keeps some families out of the rental market, due to the credit hit, but landlords today nationwide are being far more reasonable, given the sheer volume of foreclosures.
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