What Happens During Foreclosure — And What Are Your Best Options

How Long Will A Foreclosure or Bankruptcy Affect My Credit?
What Can I Do About Power of Sale or Foreclosure?

In Canada at least, bankruptcy is significantly worse for your credit rating. The reason is that a foreclosure only affects your mortgage, whereas bankruptcy affects all your unsecured loans and should only be used as a last resort.

It’s important to understand that if you do file for foreclosure, it will not affect secured debts — such as your mortgage. Simply because you file for bankruptcy in Canada does not mean that you will lose your house or go through foreclosure. Bankruptcy will also not stop a foreclosure process that is ongoing, since mortgages (a secured debt) are not necessarily affected by bankruptcy.

Also, the rules for bankruptcy vary from province to province, so your trustee will be able to explain what will happen to your mortgage and home if you decide to declare bankruptcy, as well as how a bankruptcy affects a foreclosure.

What Is Foreclosure?
Foreclosure is a legal process which happens (in certain provinces — others use a similar but faster process called Power of Sale) if you cannot pay your mortgage and the lender takes over ownership of the property. The lender then sells the house to pay the balance of the debt.

If the home sells for less than you owe on the mortgage, you may face an additional legal judgement which forces you to pay the balance which the lender could not recover by selling the house.

Generally, if you have trouble paying off your mortgage and miss two payments, your lender will get in touch and request you catch up on those payments immediately. If you miss another payment, or you cannot catch up and stay current on your mortgage, the lender will likely start foreclosing.

What Is Bankruptcy?
Bankruptcy happens when you are unable to pay back your “unsecured” debts, such as credit card bills. It is a legal process for dealing with debts. In a bankruptcy, a trustee takes over your assets and sells them off to pay as many debts as possible.

Bankruptcy is serious enough that no one really wants to use it, but sometimes you are in such a bad situation that you need to at least consider it. Bankruptcy has serious long term implications and it’s not necessarily the right option for every borrower.


What Happens During Foreclosure — And What Your Best Options Are
Foreclosure is a judicial process which generally takes between 6-10 months. Lenders prefer not to foreclose unless it looks like they must. This means you can often work out an alternative payment plan by contacting the lender and explaining the circumstances that led you to miss payment. It is generally in their interest to work with you instead of facing the expense and delays involved in taking you to court.

If the lender does decide to foreclose, they will generally simultaneously start foreclosure proceedings as well as a lawsuit against you to recover any money which the home sale does not produce.

You will be informed of the foreclosure proceedings by receiving in the mail a document known as a Petition for Foreclosure. This is the lender’s way of notifying you that they have asked the court to help them recoup the money they are owed.

When or if you receive this petition, you should immediately contact a lawyer familiar with the foreclosure process. You will have to file with the court a Response to Petition within 21 days, otherwise the foreclosure process will go on without you and there will be no way to protect yourself.

After filing your response, you will be notified of a hearing at which you should appear with your lawyer to present your case in front of the judge. The judge will generally give you a set time period (usually six months, though you can ask for an extension and the lender can ask the court to reduce this time) to pay back the loan including taxes, interest, and costs.

If you cannot repay the money, the lender may apply to the court for what is called an order absolute. If the court issues this order and the lender takes possession of the house, you lose the house — but you also do not owe the lender any more money, and the deal is done.

However, lenders usually do not usually ask for orders absolute. Rather, they usually sue you at the same time as they begin foreclosure. This way, if they do not make enough money from selling the home to pay off the outstanding debt, they can still try to collect the money via a judgment from you. This judgment always appears on your credit report, with very serious consequences.


How Long Will A Foreclosure or Bankruptcy Affect My Credit?
As a rule, bankruptcies are kept in your credit file for 6 years after the data of discharge (for your 1st bankruptcy). Judgments and foreclosures will be on your credit report for 6 years starting with the date they were filed.

Not all foreclosures will appear on your credit report. Your credit report is intended for unsecured debts, so many mortgage lenders do not report foreclosures (a secured debt) to credit reporting agencies. However, this has changed significantly since the financial crisis, so you should assume a foreclosure will affect your credit score unless you verify the situation is otherwise.

Judgments (where a lender was unable to recover the full balance of the mortgage by selling the house, and sued you for the balance) will always appear on your credit report, for 6 years after the date filed.

How Does A Foreclosure Affect My Credit
The effect foreclosure will have on your credit score varies depending on your situation, the lender, how much the property is worth, and how much you owe. The answer to the common question, “How bad does a foreclosure hurt credit?” is therefore — it depends.

Up until fairly recently, lenders commonly did not report mortgages at all to credit bureaus. (Mortgages are secured loans, unlike the unsecured loans for which credit reporting is primarily used.) This meant that your credit score would not be affected at all by a foreclosure, as long as the bank could recoup their money by selling the house.

Foreclosure may not affect your credit
If your lender has not reported the mortgage to the credit bureaus, then your foreclosure may not affect your credit score. In this situation, the foreclosure will only show up if the lender obtains a judgment against you in order to recoup more money. If selling off your house does not pay the balance of the loan, then the lender will sue you and secure a judgment for the balance of the loan and costs.

The judgment resulting from this process most certainly does show up on your credit score, and will severely damage it. Therefore, if you are fortunate enough to have a lender who did not report your mortgage, giving your house back to the bank does not end the situation. The bank may still sue you, with serious effects.

Unfortunately, you may not even be this fortunate. The recent trend in Canadian lending is to report mortgages from the beginning. The reason is, lenders have grown concerned that there might be a flood of mortgage defaults if interest rates go up or the economy slows. In order to protect themselves and reduce the risk of defaults, they have started reporting mortgages (as well as foreclosures!) in the same way lenders report secured car loans or vehicle repossessions.

In general, any time a foreclosure does appear on your credit record, it is one of the most damaging events that can happen to your credit history. It is generally preferable to opt for a short sale or a deed in lieu of foreclosure if possible.

After a foreclosure, you will generally have to wait 7-10 years before a mainstream lender will give you a loan. Even then, you may have to provide a solid paper trail showing the lender that you are credit-worthy.

Otherwise, you will be looking at alternative and sub-prime lenders. Some lenders will be willing to lend you money or write you a new mortgage as soon as two years after a foreclosure or bankruptcy provided you’ve re-established good credit since then.

How long do foreclosures stay on credit report
For many years, foreclosures rarely appeared on your credit report at all. This is because mortgages are a “secured” loan, whereas your credit report mostly charts unsecured debts (such as credit cards). A foreclosure would only appear on your credit report if the proceeds from the sale of the house were not enough to cover the balance of the mortgage, and the lender had to file a lawsuit and obtain a judgement against you to get all their money back.

Since the financial crisis, some lenders have changed their policy. They have started reporting all mortgages to the credit bureaus, afraid that a sudden jump in interest rates or another factor might trigger a wave of mortgage defaults and foreclosures. If your bank or lender reported your mortgage to the credit bureaus, a foreclosure will appear on your credit report regardless of whether the sale of the house is enough to cover the loan.

How Long Will A Judgement Or Foreclosure Affect My Credit Rating?
Both judgments (resulting from a lender suing you to recover the balance of a mortgage after a foreclosure sale did not cover it) and foreclosures (if reported) stay on your credit file for the same amount of time. They will be kept on file for 6 years after the date of filing.

This means it will generally be 7 years before you can obtain a mortgage again from a traditional lender. However, under certain circumstances (if you can demonstrate you are no longer a credit risk) some lenders may be willing to write you a mortgage within two years, often at a somewhat higher rate due to the risk premium.

What Are The Other Effects Of A Low Credit Rating?
A foreclosure on your credit report does not merely affect your ability to get a new mortgage. Credit scores are major factors in your ability to get any new loan. (The lower your credit score, the larger the risk you appear to present, and so the lender will tend to give you a lower credit limit and a higher interest rate.)

Some potential employers may ask you for permission to check your credit report in order to determine whether they are taking a risk by loaning you their property, such as a company car. In this case, bad credit could cost you a new job.

When you go to rent a car, the car rental company may look at your credit history in order to see whether they are taking a big risk by loaning you a rental car.

Lastly, the same may be true for rental housing. Some landlords may take your credit rating into account when assessing whether they want to take you on as a tenant. If you have bad credit, they may pass you over for a person who has a good credit rating.


What Can I Do About Power of Sale or Foreclosure?
Needless to say many homeowners facing foreclosure are not enamoured with the idea of waiting two to six years before they can purchase a home again without having to pay cash. In fact, many homeowners would rather not leave their current home at all.

This is where alternate financing programs such as the HOS Financial Refinance Program come in. HOS Financial provides you with immediate financing — enabling you to stop the foreclosure before it reaches your credit report — and credit counselling so you can nurse your credit score back to good health. This means you have a much lower risk of ever facing foreclosure again.

If you are facing foreclosure and want to avoid the serious problems a foreclosure can have on your life, contact HOS Financial today to find out how they can help you.