Facing foreclosure? Alternatives that can save your credit

Are you facing foreclosure on your home? If so, you're not alone. Home foreclosures are soaring in the US. According to a 2009 RealtyTrac report, 2008 showed an 81% increase in foreclosure filings over the housing crash of 2007. None of us want to become a part of those statistics. You may think there's not much you can do to avoid foreclosure, but in many cases, there are alternatives.

Reorganize finances and priorities

When you're facing foreclosure, it's tempting to think there's nothing you can do about it, so you don't bother changing your spending habits. But now is the time to take a hard look at your finances and priorities. There are almost always ways to save a little money—such as shopping at discount grocery stores, carpooling, and eating at home instead of at restaurants. Even though you may save only a little at a time, it adds up. Thrifty habits can put you on the road to financial recovery—and may help you save your home or credit rating.

Reduce your mortgage obligation

There are generally two ways you can approach this: You can negotiate with your lender or you can file for bankruptcy. In times of soaring foreclosures and sluggish housing markets, your lender may be willing to make a deal that keeps you in your home. If you file for bankruptcy, you may be able to obtain important protections and reduce your debt—including your mortgage—by a significant amount.

Consider a short sale

In some cases, your lender's risk department may discount your loan balance via a short sale, allowing you to walk away from an unaffordable home without a foreclosure on your credit history. A short sale involves selling the property for less than your outstanding mortgage balance and turning the proceeds from the sale over to the lender, satisfying your debt by mutual agreement. Be aware, however, that there may be tax consequences, as the amount of debt not covered by the sale can be taxed as income. It's wise to consult with a tax professional before making a decision.

Be proactive

Some who are facing foreclosure simply avoid thinking about a difficult issue. Others believe they are powerless to stop it. But if you are in this situation, it's best to be proactive. Think about these foreclosure alternatives and whether any of them might work for you. Talk to a tax professional and a real estate lawyer before you commit to a course of action. A foreclosure alternative may help you protect your credit—and your peace of mind.