Bankruptcy Not Always the Best for Avoiding Foreclosure

For homeowners who have found themselves struggling to keep up with their mortgage payments after an increase in their rate or a change in their personal finances, trying to negotiate changes or modify a home loan is a better option in avoiding foreclosure than filing bankruptcy. Bankruptcy typically is a solution to an unmanageable financial burden when it consists of other debts in addition to your mortgage, like credit card and medical bills.

Bankruptcy judges are able to reduce and eliminate certain debts, but a first mortgage on a primary residence (a home that is occupied by the owner) is not one of them. A judge can not alter the total amount owed, the interest rate or any other term on these home loans. Alternatively though, a bankruptcy judge can reclassify second and third mortgages as unsecured debt which decreases their priority in being repaid, but unfortunately the weight of a mortgage burden is usually due to the first mortgage on a property.

Bankruptcy is a better prospect for homeowners struggling with a mortgage on a rental or investment property, in which case a bankruptcy judge does have the power to enforce a modification.

Regardless of the type of ownership on a property, if the homeowner is facing foreclosure, the only real tangible benefit to filing for bankruptcy that applies across the board is that it will postpone the foreclosure proceeding by at most a couple of months, only providing some temporary relief. There is also some anecdotal evidence that filing for bankruptcy can put a mortgage lender in a position that prevents them from allowing or being inclined to modifying a home loan. With the federal government’s insistence on lenders to negotiate new manageable terms on home loans, pursuing a loan modification should be the better path to preventing foreclosure.

For homeowners who feel that bankruptcy is an option for them, the American Bar Association provides more details for you to consider when making the decision. After reviewing this information (http://www.americanbar.org/groups/public_education/resources/law_issues_for_consumers/bankruptcypros.html) the next logical step is to consult with an attorney.

Options when Facing Foreclosure

The options that can help you save your home are time sensitive. We can't stress that enough.

The best option for you depends on your specific situation. For example, a repayment plan may be a fit for someone with only one missed payment, whereas a loan modification may be necessary for a homeowner facing a long-term reduction in income. A homeowner should contact their lender or a legitimate counselor as soon as they realize that there might be a problem in making their mortgage payments on time to determine the best solution. If you feel that your foreclosure relief situation has been mishandled or that your original loan was predatory, then make certain to contact an attorney who can appropriately review your case.

The range of options for a homeowner who has fallen behind on their mortgage payments includes:

1. Lender Payment Plans
   
   • Repayment plans
   • Forbearance - postponement of regular payments
2. Loan for Arrears Amount
   
   • This is available to homeowners who have their mortgage insured by either the Federal Housing Administration or a private mortgage insurer and is known as a Mortgage Insurance Advance Claim Payment. A one-time payment to the lender is made by the mortgage insurer to cover all or a portion of the default.
3. Loan Modification
   
   • Lenders will consider this option when a homeowner faces a permanent or long term reduction in income. A loan modification can help a homeowner permanently change one or more of the terms on the mortgage to make the monthly payments more manageable.
4. Refinancing
   
   • HOPE for Homeowners
5. Sale of the Property
   
   • With a realtor
   • For Sale By Owner (FSBO)
6. Investor Sale
   
   • Pre-Foreclosure Sale or Short Payoff: Lenders will consider accepting less than the full amount owed on a property through one of these sale options.
   • Assumption of Mortgage: Regardless of what the original loan documents state, a lender may allow a qualified buyer to assume your mortgage, especially if the current market value of the property is less than the mortgage balance.
7. Bankruptcy
8. Foreclosure
9. Deed in Lieu of Foreclosure
   
   • A homeowner may voluntarily transfer title to the property to the lender in exchange for cancellation of the remaining debt. Some states though allow lenders to pursue a deficiency judgment making the homeowner personally responsible for any remaining balance after a foreclosure sale. A deed in lieu of foreclosure is less damaging to a homeowner's credit than a foreclosure, though it does not always eliminate the potential income tax liability on the amount of debt forgiven.
10. Do Nothing

How to Delay Foreclosure, Short-Term Legal Tactics

Attempting to delay a foreclosure doesn’t mean you delay taking action. You must act with urgency in order to get the most from each of these maneuvers. The following list presents short-term solutions in anticipation of finding a permanent or more long-term result.

1. Call your Lender: You should contact your lender as soon as you realize that you will have challenges in paying your mortgage. A lender will be able to discuss all available options to prevent foreclosure and it will also relieve some of the pressure for them to aggressively push the foreclosure proceedings forward.
2. Pursue a Forbearance: A forbearance will allow you to postpone payments and catch up on back payments by paying down what’s owed over several months. This could give you time to attempt to sell your home or explore other options.
3. Negotiate a Loan Modification: You may be able to convince the bank to modify the terms of your home loan if you can demonstrate that you have the ability to make a lower monthly payment. The bank can add your missed payments to your balance, lower your interest rate, extend the term (amount of time given to repay the entire loan) of the loan, or possibly forgive a portion of the amount owed.
4. Challenge the Lender in Court: Since California is a non-judicial foreclosure state, meaning that foreclosure occurs outside of the courts, in order to delay a foreclosure via the legal system you will have to file a suit against your lender. It is recommended that you consult an attorney if you want to explore this option. One thing to start considering is that California state regulations governing foreclosures are very specific. If a bank or lender fails to follow these rules and associated timelines, it might be possible to bring suit against your lender, and it could compel the court to give you more time. It is recommended that you review California's foreclosure laws and Federal real estate, housing and finance laws to reveal any abuse by your lender.
5. Bankruptcy: Filing for bankruptcy will grant you a stay, which essentially freezes all bills due including your mortgage. This requires that you hire an attorney and can be costly, and is not always a long-term solution as advertised by many less-than-ethical attorneys. If bankruptcy does seem to be the right solution for you, and you are married with a spouse as co-owner of the property, consider filing bankruptcy individually with you first and your spouse later, stretching out the period of time that a stay is effective.