Most homeowners have never faced the prospect of a foreclosure. As a result, the decision on the best course of action can be difficult and stressful. If you are facing foreclosure, you have likely been deluged with a wide range of solicitations from vulture investors to lenders offering refinance services to real estate agents who desire to sell your home as a short sale.
When it comes to foreclosure, your decision can have long-lasting financial and credit implications. Whether you want to keep your home or simply surrender it to the bank, it is important to make an educated decision after evaluating all options available to you.
This legal guide will present several options for you to consider including: Chapter 7, Chapter 13, Loan modification and repayment, Short Sale and Deed in lieu of foreclosure. Since I am a bankruptcy lawyer and a licensed real estate broker I can provide insight into both legal and real estate options.
When facing a foreclosure, you may have the option of filing bankruptcy whether you want to save your home or if you want to surrender the property to the bank. If you desire to retain the property then a Chapter 13 bankruptcy may be your best option.
A Chapter 13 allows you to repay your mortgage arrears over a period of 36 to 60 months. In addition to repaying the arrears, you must also pay your ongoing mortgage payment. When a Chapter 13 bankruptcy is filed, an automatic stay goes into effect that stops the foreclosure process. In order to qualify for Chapter 13, you must earn enough income to pay the arrears, ongoing mortgage payment and (possibly) other debts.
If you desire to surrender the property and you qualify, Chapter 7 will allow you to discharge a second mortgage, line of credit, etc. Chapter 7 also would allow you to discharge other debt such as credit cards, medical debts, etc.
To learn more about this option, I recommend you consult an attorney.
If you're intention is to retain your home and you do not wish to file a Chapter 13 bankruptcy, you may want to contact your lender for a loan modification or repayment plan. A loan modification allows you to restructure your loan in a number of ways. First, you can negotiate with your lender to lower your interest rate. An interest rate reduction may be for a period of months, years or for the entirety of your mortgage loan. Second, you may be able to increase the term of your loan. Lastly, a reduction in principal may also be available, however lenders are usually reluctant to do so.
If a loan modification is not available, you may want to negotiate a repayment plan for any arrears you have incurred on your mortgage. A repayment plan allows you to pay an increased mortgage payment for a certain number of months until the arrears are repaid. This is an excellent option for homeowners who have incurred temporary job loss or other income disruption.
If you want to sell your home but you owe more than what it is worth then a short sale may be an option to consider when facing foreclosure. A short sale involves the listing of your home for sale then a negotiation with your lender(s) to approve the sale once you find a buyer.
Before deciding to sell your home, it is important that you consult with an lawyer, CPA and a real estate agent experienced in short sales. In certain situations, you may be liable to repay the difference between what you owe your lenders and the sale price of the home. This is called a deficiency balance. I have consulted with several clients who have gone through a short sale only to later discover they owe tens of thousands of dollars to one or more lenders. Also, if the home is a second home or investment property, there may be tax consequences after completing a short sale. Finally, an experienced real estate agent will guide you through the process and is a great advocate to have on your side.
Deed in lieu of foreclosure
For homeowners who wish to surrender their home to the lender, a deed in lieu of foreclosure may be another option to consider. A deed in lieu of foreclosure involves executing a deed transferring the property back to the bank. Other documents may also be required to execute the deed in lieu of foreclosure.
Oftentimes, lenders are unwilling to agree to a deed in lieu of foreclosure since the lender assumes certain liabilities (such as liens) that the homeowner has incurred during the course of his or her ownership. Also, lenders are unlikely to agree to a deed in lieu of foreclosure if there is a second mortgage, tax lien or other encumbrance on title.
In addition to avoiding the foreclosure process, a benefit of a deed in lieu of foreclosure is that your credit is not damaged to the extent it would be had the bank been forced to foreclose and sell your home at auction.
I recommend you consult an experienced real estate attorney to discuss this option in further detail.