Should I Do a Short Sale, Deed In Lieu of Foreclosure, or File Bankruptcy?

Question: I live in las vegas. I owe $300,000 on a house that is valued at $150,000 and dropping. What would be the best alternative for me? Should  I  do a short sale, deed in lieu of foreclosure, or file bankruptcy?

At present  I  am unemployed and can not afford the payments and HOA fees. I have good credit and want to protect it.

Answer: You asked for the “best” alternative considering your negative equity situation with your home, yet you also indicated that you want to protect your credit rating.

Unfortunately, these two goals are simply not possible to achieve simultaneously given the circumstances you’ve described. If you do a short sale, a deed in lieu of foreclosure, or file for bankruptcy protection, all of these options will severely damage your credit.

In fact, since you currently have good credit, you are likely to experience a drop of about 100 points or more in your FICO credit scores if you pursue any of those avenues.

The good news is that the credit scoring universe is far more forgiving than you might imagine. You can rebound after a serious credit setback and begin to rebuild credit in about a year or so.

Bankruptcy Not Advisable In Your Case

If you were not so deep under water, and if you were currently working, a Chapter 13 bankruptcy filing would allow you to keep your home.

However, in light of the information that you disclosed, particularly the fact that you can’t afford the house and the payments to your homeowner’s association, I do not see the value of filing for bankruptcy protection in your case.

It does not sound as if you are committed to or even particularly desirous of keeping a home that is in such a negative equity position.

If you did file bankruptcy to save the home for some reason or perhaps to reduce other debts (though you didn’t mention any), it may just be a predecessor to a foreclosure, in which case you’d have two serious marks against you in your credit file.

A Short Sale vs. Deed In Lieu of Foreclosure 

A short sale may or a deed in lieu of foreclosure are better options. But the truth of the matter is that a deed in lieu of foreclosure may be your only feasible solution because, as you stated, you are living in “Lost Wages,” the epicenter of the foreclosure universe (along with Miami, FL).

There’s stiff competition among underwater Las Vegas homeowners to sell their properties to buyers interested in purchasing homes via a short sale.

With so much housing inventory on the market, if you want to get out of the house as quickly as possible, and likely do the least amount of damage to your credit rating, the fastest method of getting this problem situation behind you is a deed in lieu of foreclosure.

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