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Avoiding Foreclosure - What Are the Alternatives

Sep 4, 2008
In these economic times the percentage of foreclosures in America is on the rise. The homeowner who is facing foreclosure of their primary residence has several options in an attempt to avoid foreclosure. They can negotiate with the lender in an attempt to refinance the loan, get a short sale approved or deed the residence back to the lender in lieu of foreclosure. If the lender is unwilling to negotiate with the homeowner or their representative then there are options of filing a Chapter 13 bankruptcy or a reverse mortgage if the property in jeopardy is an investment property. Even with all of these options at the disposal of the homeowner there still must be a determination by the homeowner of if they indeed wish to save the home from foreclosure or to just allow it to be foreclosed on.Once foreclosure becomes evident, first and foremost the homeowner must make the determination if they in fact want to try to keep the home, if they are financially able to save the home or if it would be more feasible to allow the home to go into foreclosure. Most homeowners attempt to avoid foreclosure due to the misconception that they will save their credit rating if their home is not foreclosed on. Unfortunately this is not correct. Once the homeowner has missed four continuance payments on the mortgage their credit report will already reflect in a negative manner equal to a foreclosure. If the homeowner's only reasoning for saving the home is to save their credit rating they are already hindered. Most homeowners want to save their home because they need a place to live and need assistance to get out of a situation which millions of American have gotten themselves into.

If the homeowner wants to avoid foreclosure and it is not too late in the process, the auctioneer is not at the front door, then the homeowner can open a line of negotiations with the lender in an attempt to refinance the existing loan. The lender will look at the homeowner's credit rating at the time of the negotiations - are there any other bills outstanding, are they in any other financial distress - and if there is equity in the home (approximately 25-30%). In addition the lender will look to the amount of time the homeowner has gone without making a mortgage payment. Sometimes the refinancing will be as simple as moving from an ARM loan to a fixed mortgage rate or if there is a FHA loan involved the homeowner could qualify for a partial claim. A partial claim is when the loan is brought current and a lien is placed on the property for the outstanding amount owed until the property is sold or refinanced. Normally, with most negotiations a forbearance agreement is used by the lender in which the homeowner is allowed to delay or reduce payments for a short period of time with the understanding that another option will be used at the close of the time to bring your account to a current status. It is a temporary cease of any and all legal action against the homeowner until a plan of action is determined. This step of refinancing to avoid foreclosure must be used early on in the process. The homeowner must move quickly once a Notice of Default is initiated.

If the homeowner has made the determination that they will not be able to keep the property there are a couple of options that they can attempt to negotiation with the lender. The first is a short sale. A short sale is when the homeowner's property has been de-valued below the mortgage leaving a shortage between what the current market value of the property and the present mortgage on the property held by the lender. With the lenders agreement the homeowner can sell the property for the fair market value and the deficiency in the mortgage is then considered unsecured. At this junction, the lender can either go after the homeowner for the rest of the unsecured debt through either filing suit themselves or selling the note to another to collect the debt for them. The lender could also forgive the debt altogether. When the debt is forgiven the homeowner is taxed on the amount forgiven as the amount is considered income to the homeowner. The recently passed 2007 Mortgage Forgiveness Debt Relief Act provides non-recognition of the income, which would otherwise be includable. Of course the forgiveness of the shortage of the mortgage is up to the lender. If the lender refuses to forgive the shortage the homeowner has the option to have the short sale of the home and then file a Chapter 7 bankruptcy which would discharge all outstanding debt that the homeowner has including the shortage on the mortgage which had become an unsecured debt upon the short sale.

Another option for the homeowner if they are not going to keep the home is a deed in lieu of foreclosure. The lender again must approve this process and in which the homeowner basically deeds the home over to the lender in satisfaction for the loan in full. In this situation the homeowner will not have the shortage as described in the short sale however the lender will now own the property. This is sometimes a more difficult negotiation for the homeowner to the lender. The key to this in the negotiation is to relate to the lender the expense they are saving from going through the foreclosure against the fact that the property could be sold in the near future. Unfortunately a deed in lieu of a foreclosure can only be perfected when there is no second or junior lien holder on the property.

Unfortunately, in most circumstances the homeowner has waited too long and the time for negotiation is long past when they walk through the attorney's door for help. In most cases the homeowner has already received the Notice of Default, several demanding letters and the letter that foreclosure is eminent. In this situation the homeowner who wants to keep their property or at least get some breathing room in order to decide what to do has the option of filing a Chapter 13 bankruptcy in order to avoid foreclosure. The Chapter 13 gives immediate protection in the form of an automatic stay. An automatic stay stops all foreclosure processing immediately upon the filing of the Chapter 13. The homeowner will then have an opportunity to make a repayment plan with the lender in which the lender would receive 100% of the missed payments over 36-60 months. Of course the debtor must stay current with all mortgage obligations at the same time as paying back the default. In addition the Chapter 13 will allow the debtor to look at their entire financial situation and any unsecured debt that they have such as credit cards, medical bills, judgments or personal loans can be repaid at a small percentage of the total amount owed within that same 36-60 month pay back period. This would allow the debtor to have more disposable income. Depending on the type of property being foreclosed on and the debtor's situation, a Chapter 13 bankruptcy could also make available such actions like a "cram down" of the mortgage if the market value of the property is far below the present mortgage. These should be discussed with your attorney, as each situation is different.

These economic times have left many Americans in dire situations in which they must make decision they never thought they would have to, like whether to keep their home or not. When someone finds himself or herself in such a situation the key to survival is not to ignore it. All of the letters and notices from the lender should be red flags to the homeowner to find help. The best help that they could find is a professional early on in the process to guide them and help with the best possible avenue for them to avoid foreclosure.
About the Author
The forgoing article on avoiding foreclosure was drafted by the Law Office of Goldstein and Clegg a Massachusetts law firm concentrating in Bankruptcy practice.
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