Surviving foreclosure does not necessarily mean keeping the property. In many cases, especially when negative equity has become insurmountable, getting out from under the mortgage provides the best path to healthy finances. The key is planning and knowing all your options, including bankruptcy options.
To come up with the right financial plan, you need to understand how foreclosure works.
It differs somewhat by state, so the below outline provides a general overview of process elements applicable to each state.
The most important difference in state foreclosure laws is that some states allow non-judicial foreclosure, a faster process that has both negative and positive implications for the debtor.
This process goes through state court systems. It’s long and predictable. By understanding what will happen, you can be prepared in advance.
The first 120 days after default
The 2014 Consumer Financial Protection Bureau Act requires lenders wait 120 days after default before filing foreclosure. Congress created this rule as a way of encouraging lenders and borrowers to explore loss mitigation options that prevent foreclosures.
Borrowers with equity generally either make arrangements to keep the home or sell it before foreclosure takes place. For those with underwater mortgages, the decision to try and keep the home or let it go has much harsher consequences, as outlined below.
Loss mitigation options for keeping the home:
•Negotiate a payment plan with the lender
•Loan modification (reduces payments to an affordable level)
•Negotiate a payment plan with PMI insurer
•Declare Chapter 13 bankruptcy
Bankruptcy instantly stops the foreclosure process. A Chapter 13 allows the borrower to make adjusted payments and lasts up to five years. In some situations, borrowers with a small amount of equity can file Chapter 7 and still keep their homes.
Loss mitigation options for letting the home go
•Sell and use equity to settle any remaining mortgage debt
•Short sale (if under water)
•Deed-in-lieu of foreclosure (if short sale fails)
Underwater borrowers may incur tax liability. The IRS considers the amount between the mortgage balance and sale price as income. Some borrowers opt against these options because they would incur too much tax liability. Other borrowers qualify for exemptions. Exempt borrowers have higher motivation to accept these deals as they end up owing nothing.
Notice of Default
If no action is taken by the borrower in 120 days, the lender sends the borrower a Notice of Default (NOD). The NOD starts the legal process of foreclosure. Borrowers have 90 days from receipt of the NOD to bring their account up to date. Loss mitigation options can still be used to stop foreclosure during this time period.
In judicial foreclosure, the lender must file a lawsuit in state court and obtain a judgment before putting the property up for sale. Borrowers can fight the bank in court and try and keep the home. The services of a foreclosure attorney are recommended.
Notice of Sale
Once the lender wins a judgment, it has the right to sell the property at auction. The lender will send a notice of sale to the borrower that indicates the day of the auction. In most cases, the borrower must pay the outstanding balance prior to the sale date to reinstate the loan.
Most states have a redemption period, during which the borrower can redeem the property by paying off the entire balance. The time period varies by state, but it’s often three months.
Once the redemption period ends, the new owner has the legal right of possession. If the former owner remains in the property, the new owner must either come to an agreement with the former owner on a move-out date or follow the legal eviction process.
Many states allow a deficiency judgement, which requires the borrower to pay the amount between the sales price and mortgage balance. Once a deficiency judgement is issued, lenders can garnish wages. Chapter 7 bankruptcy wipes out deficiency judgements.
Short sales and deeds-in-lieu of foreclosure bar the lender from obtaining a deficiency judgement but may have tax consequences.
Non-judicial foreclosures began after the 120 day loss mitigation period. It moves fast. As with judicial foreclosure, the lender must file an NOD and a Notice of Sale. Some states allow a redemption period, others have no redemption option. Timelines vary somewhat by state, but the process generally takes three or four months, at which point the new owner has title and the right to evict.
Foreclosure hurts families, but they can be dealt with in an advantageous way. When loss mitigation fails, borrowers in judicial foreclosure states must either fight to save the home or let it foreclose, at which point a deficiency judgement may force the borrower into Chapter 7, sometimes years after the foreclosure finishes. Non-judicial foreclosure states provide fewer options for saving the home, but the borrower never has to worry about a deficiency judgement.
If you are facing the real possibility of losing your home to foreclosure, our Bankruptcy Attorneys at Hines Law can help. Every case is unique, depending on your circumstances and bankruptcy may be the best way to save your home in the long run. Serving clients throughout Massachusetts, we understand the importance of your home to you and your family. Our Bankruptcy Law Firm has helped numerous clients by stopping foreclosure and achieving debt relief. If you are looking for an experienced lawyer who will provide honest advice on your options, look no further, contact us today to schedule a Free Consultation!