Avoiding Home Foreclosure through Bankruptcy:
In the current economic climate and in the midst of the nation's largest ever foreclosure crises, more and more people are looking for ways to save their homes. This is a brief summary of the remedies for mortgage delinquency under the Federal Bankruptcy Code.
In California, after a homeowner becomes three months delinquent, the Lender is able to file a Notice of Default against the title to the Property. This is where the foreclosure process begins, and things accelerate quickly from this point. Three months later, the Lender is authorized under California State Law to Post a Notice of Sale and schedule a date and time 20 calendar days later for the auction or sale of the property. Once the Notice of Sale is posted and the Sale Date Scheduled, filing for Federal Bankruptcy Protection is the only way to stop the sale of the Property.
CHAPTER 13 Bankruptcy:
The most common method of seeking to cure mortgage default is through the process of Chapter 13 Bankruptcy. Under Chapter 13, the Debtor submits a Plan to the Trustee (known as the Chapter 13 Plan). Under this plan the delinquency can be spread out over 36 to sixty months.
The Debtor will need to demonstrate sufficient income to support the Plan. Assuming the Debtor is able to make the Plan payments and keep current the Debtor will avoid foreclosure and keep the home.
In situations where there are 2nd and 3rd liens against the property, filing for Chapter 13 may also help the Debtor eliminate the payments to the 2nd and 3rd mortgages. Particularly now where home values have fallen so drastically, the code sees these liens as unsecured. This allows the Chapter 13 Court to "lien strip" the 2nd and 3rd mortgages rendering them unsecured and in the eyes of the court makes them a non priority debt that the Debtor may never have to repay.
Chapter 7 Bankruptcy:
In a lot of cases, the Debtor is unable to make any payments to anyone and therefore needs to seek protection under Chapter 7 of the Bankruptcy Code. Filing for Chapter 7 Bankruptcy will place an automatic stay on the sale of the home and the Debtor will be able to stay in the home while the case is pending and sometimes even longer. This can often give the Debtor time to seek new employment, gather savings to procure a new place to live, etc.
Chapter 7 will further cancel all the debt that is secured by the Property including any 2nd liens or Home Equity Lines of Credit.
It is important to understand the distinction, Chapter 13 is about saving the home, and Chapter 7 is about saving you. Chapter 7 will not forever prevent the foreclosure sale. Although the debt is cancelled as to the Debtor, it remains a lien on the Property. Chapter 7 allows you to leave on your own terms and generally on your own time. Such is deemed preferable to being ousted by the Sherriff and having all of your belongings place on the street. As well, it is a means to avoid a deficiency judgment.
A deficiency Judgment is levied when the Lender forecloses on the Property, sells it at auction and does not attain a sales price equal to or greater than the loan they made to the Debtor. Under the terms of the mortgage documents, the Lender will be allowed to pursue the Home Owner for the difference.
Bankruptcy's Effect on Your Credit Score:
It should be no secret that both bankruptcy and foreclosure will have a negative impact on your credit score. However, more often than not bankruptcy is the preferable option when trying to rebuild credit. Here's the simple math:
A foreclosure will damage your credit score for many years, will not get rid of your other debt, and is particularly harmful if you are house shopping. Thus you have taken the Credit hit and are still in debt.
In contrast, discharging your debts in bankruptcy will harm your credit score, but can help you rebuild your score quicker than after a foreclosure. This is because bankruptcy will leave you solvent and debt-free-and therefore able to start rebuilding good credit sooner. Your debt to income ratio will quickly fall through the floor and this has an inherent positive effect.
Keep in mind that the current mortgage meltdown and credit crunch (which are prevalent at the time this article is being written) may change the way bankruptcy and foreclosure affect credit ratings.
We see more and more people who hired Loan Modification Companies to procure a "Loan Modification" on their behalf under the promises made by the Obama Administration's "Hope for Homeowner's" or "Home Affordability Modification Program". Consumer and government dissatisfaction is at an unprecedented level with regard to lackluster non responsiveness from the major lending institutions, and the ineptitude of the newly hired "Negotiators" and "Underwriters". As well, many of these modification companies instructed homeowners to voluntarily fall behind on their mortgages.
This has resulted in the accumulation of late fees, legal fees, penalties and so forth which now makes it impossible for the Home Owner to reinstate the loan on their own and avoid foreclosure.
The Banks are insured for the losses. The mess that is the quagmire of servicing companies and Investors who own the loans has made it virtually impossible to determine who will incur what loss. As well, the Bank's are required to perform a "Net Present Value" test. Under this test, if the first lien holder will endure less loss through foreclosure than through a modification, they are free and obligated by their investors to pursue the foreclosure.
So, in a typical scenario we can look at a house that has $300,000.00 owed on it. The Present value of the home is $250,000.00. The first lien holder is secured up to $230,000.00 and the 2nd lien holder to $70,000.00. The first lien holder will not provide a modification as they can be made whole through a foreclosure. The second lien holder has no say, and if the first lien holder forecloses, the second lien holder will then have a right of action against the homeowner.
The above is a summary survival guide for those facing foreclosure. It is not intended to be legal advice. Every situation is different, and every person facing foreclosure needs to consult an attorney.
If you are facing foreclosure, or know someone who is but who is too afraid to face up to reality, call our office to schedule an appointment. We aren't here to place blame, we are here to fix the problem.