Foreclosure:

This is the process the bank takes when you are no longer able to pay your mortgage to them (and do not pay them). The banks work, through the court system, to take back their asset (your home) that they secured the loan with.

The process here in Illinois takes from 6-12 months generally to be completed. During this time, you can live in your home. At the end of the process, you will be asked to leave, and if you do not, you can be forcibly removed with belongings set to the curb as in an eviction. A bank will then post a foreclosure on your records, which not only takes your credit score down dramatically (as in the short-sale), but then it also puts a “foreclosure” on your credit record.

This prevents you not only from buying a home for at least 7 years, but also opens you up to future collections. With a foreclosure, the bank has not forgiven you what you owe them. And, the debt is much larger than that involved in a short-sale.

Therefore, at any point in the future, when you own something (let’s say a nice car, or truly anything of value), the bank can have the right to take that from you as “payment” toward what you had owed them. When a debt is completely forgiven through a short-sale, you do not run this risk, and therefore is almost always the better option.