Options for Homeowners in Foreclosure
OPTIONS FOR CALIFORNIA HOME OWNERS STRUGGLING WITH REAL ESTATE DEBT
Approximately 70% of our clients come to us due to problems with their real estate. Many clients are behind on their mortgages or owe far more on their home than what it is worth. It is important that homeowners understand that there are many different options for their real estate, so client can make an informed decision on what to do with your home or rental property.
Many law firms just handle bankruptcy and try to “sell” you on that service. Our firm is a full service debt relief agency. Our goal is to help you understand the pros and cons of all your options so that you can select what solution best works for your family.
We deciding what to do with real estate in foreclosure, important factors to consider include:
- your income
- the current fair market value of the real estate
- the balance you owe on the property
- how much income it produces
- how many mortgages are on the property
- potential tax consequences
- the amount you are in arrears and
- your long term desire to remain living in a particular location
At your consultation, we will help you weigh these factors and make the best possible decision. The following are common options that we discuss at a consultation.
1) Loan Modification
A loan modification is where you negotiate a reduced mortgage payment or reduction of principal balance owed with the lender. The lender will review your monthly income and expenses to determine if you qualify for their modification plan. Any modification agreement must be voluntarily agreed upon by you and the lender. It can take many months for a lender to offer a loan modification, and often the lender will continue moving forward with the foreclosure process while your application for loan modification is pending. The positive of loan modification is that the new mortgage payment is a permanent long term solution. If you do not have much other debt, modifying a home loan can save your credit when you don’t really need a bankruptcy. Loan modification can also save you thousands of dollars over the life of you home loan.
2) Loan Modification Paired With Bankruptcy or Debt Settlement
Many clients have racked up lots of credit cards debts and liquidated their retirement accounts in an attempt to keep paying for a mortgage that was not really affordable. Often, even when we assist clients in getting a mortgage that is now affordable, the clients already have a lot of unsecured debt that needs to be dealt with too. Our goal is to help clients have a clean, healthy financial outlook after working with our office. Sometimes this means doing multiple projects together to make sure that all of the debt is gone. We help many clients get rid of the unsecured debt through bankruptcy and debt settlement before, during or after their loan modification.
3) Allow the House to Foreclose
Many clients that owe far more than what the property is worth are electing to allow the house to foreclose. This is also a common option for people with drastic income losses who can no longer afford a mortgage payment and would now rather rent. Our office provides explanations and advice about the foreclosure process. We make sure that clients know how long they have left in the property before they have to move out, and offer tips to prolong the stay in the property. For most homeowners that have just one mortgage on the property, they can let the house go into foreclosure without tax consequences and without the lender being able to sue them for any balance owed that is not collected in a foreclosure auction. It is often more difficult to let rental property foreclose with out consequences then it is for a primary residence. However, it is important to speak with an attorney to be sure that there will be no tax or debt burden created from the sale of your house.
4) Surrender the House in Chapter 7 Bankruptcy
In a Chapter 7 bankruptcy, ALL of your debts are presumed to be discharged in the bankruptcy unless you do something that removes that particular debt from the case. If you do not sign a reaffirmation agreement removing your mortgage from the case, then when you pull your credit after the bankruptcy, the lender will report your home loan as “discharged” on your credit. Think of mortgages as have two parts: 1) the debt you owe, and 2) the security interest that the lender has in the property (this is what gives the lender the right to foreclose when you stop paying). A discharge in bankruptcy will wipe out the debt that you owe, but that does not mean that you now own your house free and clear. It’s that nasty security interest that can put the house in jeopardy in the future and allow the bank to foreclose when you don’t pay. The bankruptcy discharge will prevent the lender from collecting against you on the balance you owe. This option can be good for clients who are not sure they will be able to make payments long term. Also, many second mortgages are recourse loans where a lender can sue to collect the deficiency balance owed after a foreclosure. The bankruptcy discharge prevents a second mortgage from ever being able to collect.
5) Keep the House Paired with Bankruptcy or Debt Settlement
Many clients have a lot of credit card debt and medical bills that they make large monthly payments on. That type of unsecured debt is dischargeable in bankruptcy and can be settled for far less than what you owe. The monthly payments on unsecured debt can be very high and, if you are making the unsecured debt payments each month, there is less money available to pay the mortgage. By settling or bankrupting unsecured debt, it can open free up enough income on a monthly basis to allow clients to keep their home without having to modify the loan or get rid of the house.
6) Catch Up on Mortgage and Eliminate Second Mortgages with Chapter 13 Bankruptcy
Chapter 13 bankruptcy allows clients to repay mortgage arrearages over a 3 to 5 year period of time. Also, if your property is worth less than what you owe on your first mortgage, bankruptcy courts are allowing Chapter 13 bankruptcy filers to wipe out their second mortgages completely – this is called “lien stripping.” Lien stripping is not available in Chapter 7 bankruptcy cases. Chapter 13 bankruptcy is a very comprehensive solution for many clients because it eliminates the unsecured debt, gets you caught up on the first mortgage, and eliminates the second mortgage all in one action. However, the Chapter 13 monthly payments to the court can be quite high, and the bankruptcy court has oversight of your income and expenses for several years. Many people do not like that kind of court oversight into their lives. When you come in for a consultation, your attorney can discuss the pros and cons and give you an estimate of what your court payment would be if you select this option.
7) Repayment Plan with Lender
Almost all lender offer a simple 12 month repayment plan to get you caught up on mortgage arrears. This option is really just a “catch-up” plan and you do not get any discount on what you owe. This options works well for clients that got behind on a mortgage due to job loss or lack of income, but now have sufficient income to meet the monthly mortgage payment again.
8) Short Sale
In a short sale, the lender allows a homeowner to sell his or her property at market value. Although the sale price may be lower than the balance owed on the home, the lender agrees to it because they will have better chance at recovering their investment. By agreeing to a short sale, the homeowner will avoid having a foreclosure on their financial record. A short sale is ideal for people who want to avoid foreclosure but are sure that they are ready to give up the home. A short sale is also a good option for someone who is not eligible for a loan modification. This office recommends hiring a realtor with specific experience in short sales to help you navigate this process. We would be happy to recommend an experienced professional in your area.
9) Settle a Second Mortgage
Many of our clients have very large second mortgages that are difficult to pay. When a property is worth less than what you owe on your first mortgage, we have a lot of success in getting the lender to negotiate a settlement to remove the second mortgage completely from the property. This helps by eliminating that big second mortgage payment and brings what you owe against the real estate a lot closer to fair market value. For clients with large seconds, sometimes just removing the second mortgage is enough to make the house affordable long term. We are currently settling second mortgage for approximately 8 to 15% of the balance owed, depending on the home value and the lender involved. We track the settlements we obtain, and can show you example or settlements that we have received with you lender in particular.