Mortgage Foreclosure: Your Options Explained
This podcast focuses on issues related to mortgage foreclosure and the use of the automatic stay, whether a Chapter 7 or Chapter 13 bankruptcy is filed. It also discusses options available to you as a borrower with mortgage lenders.
Hi everybody, welcome to another video on my YouTube channel. Thank you for following along, and feel free to subscribe to my channel.
Today’s topic is foreclosure and your options if you’re facing foreclosure. Now, there are several options you can consider, and I’m going to go through all of them. Sometimes, you need to combine the different options, and we’ll figure out how that applies.
Voluntary Mortgage Foreclosure
So the first thing you can do is nothing. Let the house go into foreclosure. The problem is that you must determine if your state allows a deficiency judgment.
What’s a deficiency judgment? Very simple. You owe $300,000 on your house, and it’s sold in foreclosure for $200,00. That 100,000 is the deficiency, and it doesn’t necessarily disappear. Why?
Remember, you signed a contract with the lender saying you would pay back $300,000 but didn’t. The lender only recouped $200,000 through the foreclosure auction. So when that happens, some states will require you to pay back that $100,000. You might even get a 1099.
How did debt become income? I’ve said this before. I have no idea. Just leave it up to the people in Washington to pass laws that make no sense. Actually, I do know. Creditors have better lobbyists than you, so that’s how $100,000 in debt converts to income.
However, the good news is that an accountant should be able to handle it. So don’t stress paying taxes on $100,000 of income that does not exist.
Refinancing Your Mortgage
Another option is to refinance your mortgage. Most people don’t know a mortgage refinance can be done during foreclosure. No law says it can’t be done.
Of course, if there is zero to little equity, you can forget about it. But if your property has substantial equity, the lender might be willing to refinance the mortgage.
Remember, chances are mortgage lenders lose money on a foreclosure and banks are not in the business of selling homes. That’s what real estate brokers are for. Banks are in the business of loaning money. So if they can get the same amount of money you owe, refinance to catch up on arrears, and stretch out the payments, they make more money in the long run.
However, it does cost you more money. For example, if you had fifteen years left on your mortgage and added another five or ten years, that would add up with the interest payments. But you avoided foreclosure.
Renegotiating Mortgage Terms
The other option is to try to get new mortgage terms. Is there a rule that says you can’t? Again, this depends on the home’s equity and your financial situation.
Suppose you were unemployed for six months, but now you have a new job and can afford to make mortgage payments again. The lender could agree to add those six months at the end of the mortgage.
Negotiating new mortgage terms is different from a mortgage refinance. A mortgage refinance replaces the old mortgage with a new one.
While the lender isn’t required to do so, and there’s no obligation to negotiate with you, lenders became more flexible after the mortgage foreclosure crisis.
A Deed in Lieu of Foreclosure
Now, here’s an interesting option. You don’t see it so much these days, but during the mortgage foreclosure crisis, it was common for cases to be delayed for months and years. So, it was easier and less expensive for the lender to pay homeowners to leave the house.
Typically, there were requirements such as vacating the property in thirty days and leaving the house in good condition. Why?
Well, frustrated and upset, homeowners were taking a hammer to the walls and floors, destroying everything. I’ve even heard stories of bags of concrete being poured down the toilet.
In one of my last foreclosure cases, my client was someone I knew from the courthouse. I was able to get him $10,000 from the mortgage lender. That helped him move into a new place.
Bankruptcy and the Mortgage Foreclosure Process
There are a couple of choices with bankruptcy. There’s the automatic stay when bankruptcy is filed, whether Chapter 7 or Chapter 13. The automatic stay will stop most lawsuits but doesn’t last forever.
Starting with Chapter 13 bankruptcy plan, the arrears and ongoing monthly mortgage payments are paid back. The automatic stay remains in place while the bankruptcy case is pending. It even applies to cosigners and co-borrowers.
The automatic stay is a powerful tool to prevent creditors from moving forward, but how does it work with Chapter 7 bankruptcy?
First, understand that Chapter 7 bankruptcy is not an option to save your home. That’s only possible with Chapter 13 bankruptcy. So, how can Chapter 7 bankruptcy help? It depends on the situation.
For example, what if you are in foreclosure but have a buyer interested in your property? During foreclosure, communicating with the bank is next to impossible, and contacting the law firm representing the bank isn’t easy either. Although, sometimes, a motion can be filed to put the bank and foreclosure attorney on notice.
But if that option doesn’t work, the automatic stay kicks in once Chapter 7 bankruptcy is filed. Now, here’s the catch. If your house is in foreclosure and you filed for bankruptcy, the new homebuyer can’t close on the property until the bankruptcy is over. So now what?
In this situation, Chapter 7 bankruptcy is being used to buy time. When this situation applies, the debtor fails to appear when the 341 meeting of creditors is scheduled. That results in the case being dismissed.
Once the Order of Dismissal is filed, the lender can proceed. The original mortgage lender will take time to continue the foreclosure case, so the home is sold during that time.
So, Chapter 7 bankruptcy will slow down the foreclosure process. But remember that Chapter 13 bankruptcy is how you save your home by paying back the mortgage arrears.
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Please note the information on this site does not constitute legal advice and should be considered for informational purposes only.
This podcast was transcribed for clarity by Alex Hernandez.
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