Dealing with Possible Foreclosure: Bankruptcy

If a foreclosure is imminent, filing for bankruptcy will stop the sale and put everything on hold. A debtor is barred from pursuing collection outside of the bankruptcy process once you have filed. If you need additional time to work out a solution with your lender, but the foreclosure is already set, filing for bankruptcy may give you the time to you need, and provide the protection in case you cannot reach an agreement on your own.

Bankruptcy may allow you to stay in your house and reduce or discharge many of your debts, but this comes at a cost. Your bankruptcy will appear on your credit report for 10 years, reducing your creditworthiness. You may not be approved for a new car loan, home loan, or personal loan during this time, or you will be approved with significantly higher costs. However, the removal of your debt through a bankruptcy may be the only way to improve your credit standing in the long term.

Bankruptcy can be either voluntary or involuntary, meaning that your creditors can force you into bankruptcy. However, with individuals involuntary bankruptcy is quite rare. The purpose of bankruptcy laws is to give a debtor a fresh start, and repay creditors according to the means of the debtor. Bankruptcy can be filed through a joint petition for married people or individually regardless of marital status. In bankruptcy proceedings priorities are established depending on the type of debt incurred, with secured debts receiving a higher priority than unsecured debts.

There are 94 federal judicial districts in the United States that handle bankruptcy cases. Bankruptcies are not handled in your state court system. It is advisable to use an experienced bankruptcy attorney to assist you through this process. Bankruptcy is governed by federal laws under Title 11 of the United States Code.

The Bankruptcy Code specifies six basic types of bankruptcy. Most individuals file under the three main chapters of the bankruptcy code, Chapter 7, Chapter 13 and Chapter 11, which applies to businesses. Chapter 12 applies to family farmers and fishermen, Chapter 9 is for municipalities and Chapter 15 is for cross-border cases, in which a debtor is subject to the laws of the United States and other foreign countries. While all types will provide relief from creditors, it is important to understand which type applies to your situation. The costs and remedies are different for each type and depending on your financial situation, the value of your assets and if you are an individual or a business facing foreclosure, it is important to understand your options.

Chapter 7: Chapter 7 Bankruptcy is often referred to as liquidation, meaning that your property is sold to repay your debts. Your debtors will settle or discharge your debts often for much less than owed. Once you have filed a bankruptcy action, an automatic stay begins on any collection efforts. Your home could be exempt from the liquidation. The home-stead exemption is based on state law and the value of your property. Not all liens are discharged in a Chapter 7 either, and your mortgage or car loan may be excluded. If you do not have sufficient asset to warrant liquidation, your case is considered a “no-asset case” and many of your debts will be discharged without a repayment.

If your goal is to stay in your home and you can continue to make your regular mortgage payment, a Chapter 7 may not be appropriate. If your monthly income is greater than the state median, a bankruptcy judge will review your financial situation through what is called a “means test”. If you have disposable income available to repay some of your debts, your debts will likely not be discharged. Your filing under Chapter 7 could be considered abusive and your case will be converted to a Chapter 13 or dismissed.

After filing a Chapter 7 petition, a trustee is appointed to administer the case and oversee the liquidation. It is important to provide the trustee with all of the available information being requested, such as tax returns. The trustee will schedule a meeting of creditors, where you will be put under oath and asked questions about your financial situation and your assets. It is imperative that you answer all questions honestly, as making a fraudulent statement will create additional problems. At this meeting you will be asked questions by the trustee to insure that you understand the consequences of a discharge of debts through a bankruptcy. If you have assets in excess of the exempt values, the trustee will also oversee the liquidation. Your unsecured creditors must file a claim to receive payment from the proceeds of the liquidation.

Some debts are exempt from being discharged through a Chapter 7 bankruptcy, including child-support and alimony, most taxes and student loans, and any fines or restitution imposed by criminal courts. Debts arising from dissolution of marriage property settlement or from a negligent act leading to a judgment are not dischargeable under Chapter 7.

The filing fee for a Chapter 7 Bankruptcy is $299. With the court’s approval the filing fee may be paid in installments or be waived completely.

Chapter 13: Chapter 13 is often used to stop a foreclosure if you want to remain in your home. Unlike Chapter 7, there is no liquidation of your assets; therefore, Chapter 13 is often preferable to Chapter 7 because you can keep your property regardless of the value. Under Chapter 13, you may keep your home and make up your delinquent mortgage payments overtime. However, it is required that you make your regular mortgage payments each month after your Chapter 13 filing or you may still risk loosing your home.

Chapter 13 is appropriate if you wish to reorganize your debt and have a regular source of income, or if your income exceeded the thresholds allowed under the “means test” in Chapter 7. Under Chapter 13, you repay your debt over 3 to 5 years. The term of your repayment is determined based on your income level but is not to exceed 5 years. During this time of repayment, your creditors are not allowed to pursue collection claims.

As in Chapter 7, a trustee is appointed to your case and will schedule a meeting of creditors. During this meeting you will be sworn in and asked questions regarding your financial situation. Failure to provide truthful answers can lead to a claim of fraud. During or shortly thereafter the meeting of creditors, a repayment plan will be created. Your debt is not discharged as in Chapter 7, and you must complete the repayment plan to obtain the eventual discharge of the debts.

In Chapter 13, you will meet with the federal bankruptcy judge at your confirmation hearing where your payment plan will be approved or disapproved. Your creditors can object to the repayment plan at your hearing and ask that you repay them through liquidation under Chapter 7. The judge can approve your plan, request a modification to the plan, convert it to a Chapter 7 or dismiss your case.

Once your repayment plan is approved, it acts like a consolidation loan with payments being made to the trustee, who disburse funds as approved to your creditors. You must make your payments to the trustee directly or through a payroll deduction. During the repayment you cannot incur new debt without the approval of the trustee as it could prevent you from complying with the repayment plan. If you fail to make your payments as scheduled to the trustee, your case can be converted to a Chapter 7 for liquidation or be dismissed. Failure to pay child-support, alimony or taxes during the repayment period could also lead to a Chapter 7 conversion or dismissal.

After successful completion of the repayment plan, your debts can be discharged and creditors can not pursue collection. You will want to discuss the discharging of your debts with an attorney before requesting a discharge.

While many of same debts are exempt from protection under Chapter 13, like Chapter 7, such as alimony, child-support, taxes, restitution and educational loans, Chapter 13 does allows for the discharging of debts incurred through a property settlement in a divorce proceeding and for debts resulting from a judgment for property loss due to negligent actions.

If you are facing foreclosure because of past due amounts on your mortgage that you can not negotiate for repayment with your lender, but currently have the ability to make your regular monthly payments, a Chapter 13 is worth considering. The filing fee for a Chapter 13 Bankruptcy is $274, which can be paid in four installments with the approval of the court.

Chapter 11: If you are a sole proprietor or a business owner a Chapter 11 bankruptcy may be appropriate. Generally, Chapter 11 acts much like a Chapter 13, in that your debts are reorganized rather than liquidated. For business owners, liquidation would not be desirable, as the value of your business as a working entity is greater than the liquidation of the property. Under Chapter 11 you would be able to continue operating your business, while your creditors are precluded from collecting on your debts. Individuals may file under Chapter 11; however, it is more complicated and expensive than a Chapter 13 or 7, while providing no additional relief. The filing fee for Chapter 11 is $1,039, which can be paid in four installments pending the approval of the court.

Chapter 12: Chapter 12 applies to family farmers or fisherman only, who wish to reorganize their debt. Like Chapter 13, debt can be repaid over a 3 to 5 year period. While family farming or fishing operations could pursue relief under Chapter 11, because of the small nature of their business and the seasonal nature of their income, the government enacted a simpler code that acts similarly to Chapter 13 for individuals. The filing fee for Chapter 12 is $239, and may be approved by the court to be paid in installments.

Chapter 9 and Chapter 15: Chapter 9 applies only to municipalities, not to individuals or businesses and is not applicable in the event of a foreclosure. Chapter 15 applies to cross-border issues, in which the laws of the United States and the laws of another country apply. It is an ancillary filing that cooperates with the insolvency proceedings in another country, but can attach to property held in the United States .

Filing a bankruptcy proceeding is complicated but it can sometimes be your only way to re-establish yourself financially. In 2005, the bankruptcy laws were modified and now will require that you meet with an approved financial, credit or debt councilor before filing or discharging your debts. Meeting with a councilor before filing will help you understand if bankruptcy is your best option or if other options could be beneficial. While discharging your debts may sound appealing, it is important to understand that your credit rating will be changed and your ability to obtain additional loans will be compromised. The United States Trustee Program maintains a list of approved credit counseling and debtor education providers on their website.

When facing a foreclosure, the most important thing you can do to save your home or your creditworthiness is to communicate with your lender as soon as possible. Foreclosure is not something that will just go away. You need to be proactive to protect your rights and your property.

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Beware of Foreclosure Scams

A borrower desperate for a way out of his/her financial troubles is especially vulnerable to the opportunities that offer quick, painless, and sometimes even profitable solutions to past-due bills. When those missed payments involve a mortgage and put the homeowner in danger of facing foreclosure, they can appear to be heaven sent. Beware. Great opportunities to avoid foreclosure rarely are what they seem and, worse, the proposed relief has a way of turning into the mortgagor’s worst nightmare.

In the past, we called experts in perpetuating fraud “con artists” or “con men.” Now we call these slick operators “scammers.” They still sweet talk their way into our living rooms, engage us in conversations that trick us into divulging personal information, and then get the most vulnerable among us to sign away our futures. Being aware of the depth and breadth of foreclosure and mortgage scams can help us protect ourselves from these individuals who are nothing short of being criminals.

There are several ways that scammers come into contact with their victims. In a slow moving housing market, potential victims are enticed to call the scammer through advertisements on street corners or in newspapers with offers that say, “Cash for your house” or, “We buy houses!” These people operate by getting their victims to sign over a deed without including any legal release from the current mortgage in the process. The victims then find themselves being evicted but still having responsibility for the mortgage contract.

Some scammers are bold enough to go door-to-door, chatting with whoever answers the door, cleverly collecting bits of personal information about the homeowner or neighbors. That information is then used to develop a false sense of trust in the perpetrator, who will then very generously offer to rescue or assist the homeowner out of a financial predicament. Sadly, the homeowners willingly sign off a deed, often believing that they will be able to rent the home until they can afford to buy it back. They don’t even know that they have just given away their home until it is too late.

The most difficult to detect scammers are those who perpetuate fraud within the walls of financial institutions with trustworthy reputations. Because these people are paid to sell home equity loans, they will tell their victims how to fill out applications to be assured of qualifying for the loan, looking the other way when asset reporting is inaccurate. In reality, the victim who doesn’t have the income stated becomes a party to fraud and, of course, doesn’t have the assets to repay the loan. These loans, called Home Equity Line of Credit (HELOC), are secured against the property, which soon goes into foreclosure.

Knowledge is the consumer’s best friend in avoiding becoming a victim to mortgage or foreclosure scams that can’t do anything else but end up badly. Being savvy about whom to trust, spotting danger signs, and knowing where the legal boundaries are is the best protection.

Know whom you are dealing with.

  • Don’t be afraid to face your financial problems If you are about to or have already fallen behind in your mortgage payments, always contact your lender yourself. Letting someone else do it for you puts you in a situation of divulging personal information and you won’t know how that information may be used later.
  • Be suspicious if anyone contacts you (rather than you contacting him/her) to offer any kind of foreclosure services, or claims to be a mortgage or foreclosure consultant. Do not sign anything until you have checked it out with a trusted friend or advisor.
  • Professional looking brochures and legal documents are easy for anyone to create, even criminals. Just because the paperwork appears legitimate doesn’t make it so. Check the company or individual out with your lender or with the Better Business Bureau at
  • Do not give out personal information to anyone who calls you or appears at your doorstep even if he/she insists the information is necessary to help you. Your lender already has your information on file; anyone else asking for it is likely to be pursuing his/her own interests, not yours. This is the adult equivalent of children talking to strangers on the street and has a high likelihood of ending in financial disaster and/or identity theft.
  • In situations where the borrower doesn’t speak English well enough to understand the technical language of a legal transaction, never use a translator provided by the person or company conducting the business; these translators are known to conveniently omit or misrepresent important information. Seek out the services of an independent, professional translator. Also, never use a child to translate legal or financial matters, as they will not fully comprehend the business level discussions and may translate inaccurately.

Recognize the signs of possible fraud.

  • If an offer appears to erase all your troubles, be skeptical. Legitimate solutions to foreclosure are rarely quick or painless.
  • Consulting an attorney or a trusted friend is the only way to be certain that an attractive offer of help is truly in your best interest. Many areas have free or low cost legal clinics that you can call for advice. If a proposed offer can’t wait long enough for you to visit with a professional advisor, then it is almost certainly fraudulent.
  • Many cases of mortgage foreclosure fraud will seek to separate the borrower from a relationship with the lender. Always make payments directly to the lender as has been done in the past and call the mortgage company yourself if there is a question about where a payment should be sent. Some scammers say they can beat the system by juggling payments, but the only thing they do is not make the payments at all and the victim doesn’t know it until it is too late.
  • Legitimate refinancing offers are never “pre-approved.” If you are solicited with this kind of offer, you should react with suspicion. Do not be afraid to seek outside help to determine if an offer is really in your best interest.
  • Never sign a contract with blank spaces or signature lines. Information can be added later, without your consent or knowledge, and may change the nature of the agreement. Also, if you have been asked to “skip” a section of a contract that has a signature line, it may contain information the person you are doing business with doesn’t want you to know about. Treat the transaction as you would with anyone trying to hide something important from you.
  • If you have been asked to fill in a financial application (even if it is with your own bank) and the person you are dealing with suggests that you can exaggerate amounts or otherwise falsify information, it is likely that you are being victimized as a party to fraud. Excuse yourself from the situation and take the paperwork to an attorney or trusted friend for advice before continuing with the application.
  • Be aware of current scams circulating in your area. Listen or look for words like mortgage or foreclosure scam or fraud, equity skimming, or predatory lending schemes. Newspapers and television news sometimes run narratives about such activities, and a quick search on the Internet reveals thousands of enlightening articles.
  • Finally, if the word “rescue” is used anywhere in the pitch to entice you to solve your financial problems, you are undoubtedly being invited to be a victim. Remember that there are no painless roadways out of debt.

Just like any other criminal activity, suspected fraud or scams should be reported.

  • Immediately contact your current mortgage lender if you think someone is attempting to draw you into a fraudulent transaction regarding your established mortgage. The number to call is located on your mortgage contract.
  • The FBI handles financial fraud investigations, including home equity line of credit and equity skimming. If you believe you have been approached by a scammer, you can fill out an FBI tip sheet at
  • Using the Better Business Bureau web site, you can check for complaints against any business or private contractor, or you can file a complaint of your own.
  • To locate the telephone number or web site to file a complaint with your own state attorney general’s office, go online to or check the government pages of your telephone directory.

Many a victim has made his/her troubles worse by being too embarrassed to admit a mistake that has led to disaster. However, mortgage and foreclosure frauds are not the types of problems that go away by hiding them. Calling and talking to the mortgage provider or to an agency with resources to assist victims is the only way to deal effectively with mortgage crime and possibly prevent foreclosure. It also may help others from becoming victims, too.

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Contacting a Counselor

The word foreclosure is enough to make most homeowners shudder. It is a scary prospect that leads many people who are behind on payments to stop reading the mail and answering the phone in hopes that it will go away. Foreclosure has no real winner except for maybe investors who buy cheap foreclosed homes at an auction. The lender loses money and the homeowner is left with massive bills and damaged credit. Purchasing another home will be more costly and difficult no matter how much damage control you do. Avoid all this by acting now.

Due to the bursting housing bubble and financial institutions experiencing record high foreclosures, it can be difficult to refinance a mortgage due to financial hardship or because of increased payments as a result of an adjustable rate mortgage. For the last several years, loans were relatively easy to come by. People were getting loans they could not afford or complicated adjustable mortgages with a lot of small print that they did not understand or plan for. As usual in life, everything comes out in the wash.

Many of us are left in a situation where refinancing or selling our homes is not always an available option due to tightened loan standards and declining home sales. Where do you turn when you can no longer afford your home but cannot sell it due to decreasing home values? What do you do when banks and financial institutions shut off the spigot to anyone with even minor credit issues? Lucky for all of us there are many options available and many organizations that want to set you up with a counselor. Foreclosure counselors can do more for you than you may think.

In this article we will explore the resources offered by counselors and organizations throughout the United States . We will suggest questions that you may want to pose to assist you in getting as much benefit as possible out of your counseling. The Internet is a great resource to research all aspects of foreclosure so you are well prepared to turn this thing around.

Everyone at some point in their life faces financial difficulties that are large enough to make them want to stick their head in the sand. Our mortgages are too big and important to ignore. Even if you have been ignoring the mail and the phone calls up until now it is time to face the music. It is intimidating to call your lender when you are so far behind that you can’t see a way out but that is where a counselor can come in and assist you. These counselors not only help you speak to your lender but they can aid you in setting a budget, employment training and even financial help.

With the current declining housing market, homeowners are in a strong bargaining position. Many of the banks and financial institutions are facing millions of defaulted loans and, in turn, millions of homes that they must maintain and sell. In this market selling a home is not always simple. They do not want to own your home. They want to keep you in your loan. This gives counselors room to negotiate with your lender to get you caught up and stop foreclosure in its tracks.

This is a good time in our discussion to warn homeowners about “for profit” foreclosure rescue schemes. There are plenty of non profits ready to help so there is no need to get involved with people looking to profit from your problem and make money off of your home. Research any organization online before you deal with them.

One organization that homeowners in foreclosure or in danger of entering foreclosure can contact is NeighborWorks. Visit and find a counselor in your area. This organization’s sole purpose is to keep neighborhoods strong. One of the ways they accomplish this goal is to provide homeowners counseling to keep them in their home. They do this by connecting homeowners with counselors who can speak to lenders for them and even providing financial support.

Another option is Housing Help Now. You can reach them at to make an appointment. They will help you wade through and understand all the options available to you. This organization is determined to bring homeowners that have been caught up in the unsustainable bubble back into reality where real problems can be solved. The sooner you reach out for help the more options that will likely be available to you.

The Department of Housing and Urban Development or HUD also offers free services designed to keep you in your home. You can find a counselor in your area by calling 800-569-4287 or visit the website at

This government office can offer valuable information on all of the newest and latest government efforts to help homeowners avoid foreclosure. Some of the options that may be available to you are:

Loan Modification

Forbearance or reduced monthly payments (short term)

Working with the lender to allow the homeowner to repay arrears over time while maintaining their current mortgage payment

For homeowners whose situation is such that they must get out of the home there is a program through Freddie Mac or Fannie Mae to help mitigate the loss to the homeowner and the lender. This is a perfect example of an option that most people have never heard of or thought was available to them. Your HUD counselor can tell you if you qualify to take advantage of this program.

Which option is right for you? It all depends on your current situation and your current and future financial picture. Your counselor will help you weigh out all these factors to match you with your best alternative.

Once you have found a counselor near you prepare a list of documents and questions to bring with you to your appointment. Your document list should include:

Any and all of your original mortgage/loan paperwork

Any 2 nd mortgage information

Current W2s and last years taxes

Bring proof of all your monthly bills or prepare a list

Past due notices and contact information for your lender

There are some questions you should be prepared to ask your counselor at your first appointment. They are here to help you so you should speak up and get all you can out of your time with them.

What options are typically offered by lenders?

Do they offer budget assistance?

Will they assist you in credit cleanup if needed?

Will they be the main source of communication with the lender?

What is expected of you every step of the way?

Chances are, any good nonprofit organization will answer these questions on their website or in person before you have a chance to ask but don’t leave without the answers. When you are presented with options to catch up on your loan or to refinance be sure you are fully informed of every inch of the agreement. The hope here is to avoid problems in the future. Your counselor should be familiar with your financial situation to help you choose the option that will work best for you. You need to be very honest about your finances so they have all the information they need to help you.

If you are not yet in foreclosure but things are getting tight, you can also look into a nonprofit consumer credit counseling organization. They can help you stave off financial problems before they lead to an overwhelming situation. They can assist you in negotiating with credit cards to lower your payments and give you a chance to get caught up.

Consumer Credit Counseling Service is one of the most reputable organizations available. This is yet another area where you need to be on the lookout for the private for profit outfits. Why pay when you can get the help for free or for a small donation. You can find an office near you in the Yellow Pages or on Reaching out to them before foreclosure is looming can save you a world of trouble. They offer valuable information for all consumers on their website to ensure we are all making the right financial decisions for our future.

You have many options available to you. The threat of foreclosure is scary but it does not have to be. When you have experts on your side, you will feel more in control of your future. Your home is likely the biggest purchase you will ever make and it is worth saving. Some homeowners can improve their situation even in the short term until they can sell their property. There is really no end to the options you can work out but it all depends on you. Reach out and utilize all the wonderful alternatives to foreclosure by working with a knowledgeable counselor that is looking out for you.

Your future is worth the investment and there are countless people and organizations that are on your side. It is worth the fight now to make a better future for you and your family. Avoiding foreclosure through any and all means possible is the best choice you will ever make.

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Pre-foreclosure Sale: Selling your home to avoid foreclosure

Homeowners who find themselves in the situation where they are having difficulty making the monthly payments for their home loans, and the loan(s) are either close to, or exceed the value of the home, making a refinance virtually impossible, should consider the alternative of the pre-foreclosure sale and short sale payoff to avoid a foreclosure. Mortgage companies will not approve a short sale if the homeowner is in bankruptcy because approving a short sale payoff is considered a collection activity.

The pre-foreclosure sale was recognized by HUD in 1994 and has helped thousands of borrowers in default avoid foreclosure and make a smooth transition to more affordable housing. According to HUD, short payoffs account for 50% of all workouts on conventional loans. However, the short sale negotiation process is a lengthy one. It may take several weeks or more likely several months to get an approval.

When this situation exists, and the lender and homeowner both believe a foreclosure is inevitable, a short sale is often a way to control losses for everyone concerned. The property is listed for sale with a real estate agent at, or slightly below, the property’s “as-is” current market value, with the lender agreeing, in concept, to take a reduced payoff on their outstanding loan amount. When an offer is submitted on the property, the lender will receive a package outlining the offer and agree, disagree or negotiate the sale price.

The benefit to both parties are that the homeowner doesn’t suffer the credit impacts and stigma of foreclosure and the lender can clear a non-performing loan without the associated costs of foreclosure, eviction and property rehabilitation. Short sales are much more difficult when there are loans with different lenders against the property requiring different lenders to agree on the amounts they will reduce their loans. Short sales are also greatly preferred by lenders over a common borrower decision to give the lender a deed-in-lieu of foreclosure.

Foreclosures become costly for both the lender, who must pay legal fees, possible eviction costs, real estate commissions, etc., and for the borrower, whose credit rating would be severely damaged, not to mention the emotional toll suffered. For definition purposes, property owners behind on their mortgage payments and in default of their loan are termed pre-foreclosure. Once a notice of default has been filed in the public records, the property is in foreclosure.

Not all lenders will agree to accept a discounted payoff and release the lien that is secured to a property for less money than is owed, especially if it is more profitable to foreclose. However, they may consider it if the seller has no equity in the property, is unable to repay the difference between the offered price and the existing loan and can show some sort of hardship as to how he got himself into such a financial bind.

The lender will determine which documents are needed in the short sale package. Each lender has different requirements. It is typical to require authorization to release information, hardship letter, financial statement, purchase and sales contract, settlement statement (HUD1), pay stubs, bank statements and tax returns. Some lenders may ask for more, so be prepared. Additional documents are needed on FHA loans. All lenders require a full appraisal of the property before making their final decision to accept or reject the short sale offer.

If you have equity in your home, you can sell it just as you would if you were not in foreclosure. The only difference is that you must order the loan payoff statement from the foreclosure attorney or trustee instead of getting it from your lender. Your only concern should be closing the sale and paying off the loan before the end of the redemption period.

For homes with no equity, you must apply for a short payoff if the sale of your house will not leave enough money to pay off all the mortgages, liens, back payments, and sales commissions on your property. If this is the case, call your lender immediately and get a financial package from them to make your request for a short payoff. The sooner you do this, the sooner the lender can complete its review of your short payoff request. Different lenders have a variety of packages for your individual loan workout options. Make sure that you request and receive the package for a short payoff. The purpose of the financial package is:

  • To make certain the reason for the default was unavoidable, involuntary, or beyond your control
  • To make certain that you have experienced financial hardship
  • To make certain that you do not earn enough money now to pay the deficiency in installments over time
  • To make certain that you do not have enough money to pay some or all of the deficiency in a lump sum.

HUD has clear guidelines for reviewing short-payoff requests. As long as you meet the criteria, your request will be approved. The basic guidelines for approval are as follows:

  • You must live in the property
  • The reason for the default on the mortgage must be unavoidable, involuntary, or beyond your control
  • The house must appraise for at least 70% of the unpaid principal balance
  • The contract price must be at least 95% of HUD’s appraised value
  • The net amount to your lender, after all closing expenses are paid, must be at least 87% of HUD’s appraised value.

The lender must obtain a standard FHA appraisal from an appraiser who does not share any interest with the mortgagor or mortgagor’s agent. The appraisal must contain both “As Is” and “As Repaired” values for the property, and will be valid for six months. A copy of the appraisal must be shared with the homeowner or sales agent, if requested. After your lender receives all of the written documentation from you, they will have the house appraised. The appraisal fees are standard for the community.

Most lenders have a stringent hardship test that borrowers must pass in order to have the short payoff of their loan approved. In most cases, the borrower must be experiencing one or more of the following financial hardships:

  • The borrower or an immediate member of the borrower’s family has experienced a catastrophic illness that has wreaked havoc on their personal finances.
  • The borrower’s spouse has died or divorced and they have insufficient income to pay the loan payment.
  • The borrower’s employer has transferred them out of the area and they’re unable to sell or rent the property.
  • The borrower has been called away to active duty military service for an extended period and lacks the monthly income to pay their loan.
  • The borrower has suffered a disabling injury that precludes them from ever working again.
  • The borrower is unemployed and has no realistic expectations of finding employment in the foreseeable future, due to local economic conditions that are beyond their control.
  • The borrower has become financially insolvent, and there’s no realistic expectation that their financial condition will improve within the foreseeable future.
  • The borrower has been incarcerated and no longer has the income to pay the loan payment.

Here are some important points to remember about selling your house if a short-payoff is required:

The listing agreement that you sign with your realtor MUST provide that, “The seller’s obligation to perform on this contract is subject to the approval of the lien holders on the property. The seller may cancel this agreement prior to the ending date of the listing period without advance notice to the broker and without payment of a commission or other consideration, if the seller tenders a Deed-In-Lieu of foreclosure.”

It is very important for you to write this language on the listing agreement. If you do not, you may be liable to pay a realtor commission even if you do not sell your house! The contract that you sign to sell the property absolutely must provide that, “This contract is contingent upon acceptance by the seller’s lien holders”

If your lender does not approve the contract, this language will allow you to back out. If the contract does not have this language and your lender does not approve a short-payoff, you must either bring money to the closing to make up the shortage or your buyer can sue you for breach of contract! Your lender’s decision to approve or deny the short-payoff will depend upon many factors, as each case is different.

HUD allows a sales commission (usually 6% or less) and a consideration to be paid to the seller ($750 or $1,000).

The credit score of the seller will take a bigger hit by going through foreclosure or giving a deed-in-lieu of foreclosure than with a short sale. In fact, a short sale may result in a loss of about 100 points on the borrowers FICO score. A foreclosure or deed-in-lieu of foreclosure may result in a lost of 250 points of more.

If the bank chooses to take the loss as a tax write-off, there would be no deficiency judgment on the homeowner’s credit report; however, there is another implication. The deficiency that the homeowner did not have to pay would be considered by the IRS to be income. The lender will send a 1099 to the homeowner at the end of the year, and the homeowner will be required to pay taxes on that difference between sale and the mortgage balance at the time of the short sale.

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Communicating with your Lender Before Missing a Payment

The current housing crisis is bringing the topic of foreclosure to the forefront of the national conversation. The housing bubble has burst and many people are finding themselves unable to refinance costly Adjustable Rate Loans or unable to afford their current fixed rate loan. Depending on your circumstances, there are several ways to approach this problem. Dealing with it now can save you a host of problems in the future. Any arrangement made and kept will stay on your record as proof to your lender that you are a good risk regardless of an occasional money problem.

This article will discuss ways to avoid foreclosure by communicating with your lender before you miss a payment or before you make a partial payment. There are options for homeowners who have missed one or more payment, or are entering foreclosure but we will focus on the proactive steps you should take the second you know you are going to be late or you are unable to make your full payment.

Life always seems to hand us scenarios we have not planned for. Whether that is a health problem or the car breaking down, we are not always financially prepared for it. When it comes to your mortgage payment it can be tempting to skip a payment and get caught up on other bills but you are opening up a can of worms when you give in to that temptation. Your mortgage payment needs to be one of your highest priorities. Your home is likely the biggest transaction you will make in your life. Keeping your credit report impressive with on time mortgage payments can save you thousands upon thousands of dollars throughout your lifetime.

One positive for homeowners in this volatile market is that lenders are overrun with foreclosed homes and they certainly do not want to add yours to that bulging list. It is of no benefit to lenders to foreclose on your home. It causes lenders to incur hefty expenses and they lose your monthly interest payment. This puts you in a relatively good situation. You have the opportunity to call them up, be honest and forthright and see what you can accomplish working in partnership with your lender. Jump right in and see what they offer you. At the very least the worse thing they can say is no. This could happen but you still have options, which we will discuss.

You should be able to locate a customer service phone number on your monthly bill or payment book. If you are unsuccessful, try searching online for their contact information. You should expect to talk to your lender multiple times concerning your arrangements. This is completely normal and it is a good thing to have recorded on your account.

The first thing you should remember when calling your lender is to be polite. These people know all about the curve balls life can throw at us. They are homeowners, parents and people too. Tell them what your current situation is. Explain why you need a bit of breathing room. It is all about continuing to appear as a viable risk. If they see that you are calling before you miss a payment they will know that you want to keep your home and that you are handling it before it becomes a problem.

When you call your lender you will want to speak to someone a bit higher up than a customer service agent. It may be difficult to get a loan specialist on the phone but explain your situation to customer service and they should know exactly whom you need to speak with. Once you have someone on the phone you will want to explain your situation. Don’t get too emotional just give the facts and explain why this is a one time thing. Make sure that your phone call is recorded on your account so there is a record of you making arrangements. Be prepared before calling with all your relevant financial information such as your account number, household expenses, paycheck stubs and proof of current financial problem, if possible. This can be in the form of a large medical bill for example.

Some of the options you may be presented with are, for one example, an extension of time to make your payment. They may offer you the chance to take a couple months off from paying and tacking the amount to the back of your loan or letting you skip a month and pay a little extra in the following months. This is called forbearance. Do not assume that you have them in a precarious position because of current events in the housing market and that they have to work with you. They are only obligated to stick to the terms of your original loan. Working with you is good for them and for you but it is still a nice thing to allow you some options until you get back on your feet. Believe me, I am not telling you that they are going to do you any favors but it is good business to keep good customers. Customers who call and handle their issues before they become an unmanageable problem are valuable to any institution.

Your lender may mail you a packet to fill out and return. This information will give the lender a chance to offer you the most valuable assistance. Be honest and include any and all documents requested. This may feel like a big project but you are going to save yourself a world of trouble handling it now. It is vital that you return any requested information quickly so your lender can get started finding a solution to fit your needs.

Your lender may also offer you a chance to modify your loan. If your situation is such that you may have difficulty making your payment for many months, such as sudden unemployment, you may need to look at this option. This could buy you valuable time to get back on your feet or sell your home. If your financial picture has become a bit cloudy due to overwhelming debt you can find a credit counseling service and try to lower some of your payments. They can help you set a budget that includes a larger mortgage payment due to a reset in your ARM.

The Department of Housing and Urban Development has counselors available to assist homeowners in negotiating with their lender. They are experienced with all the options generally made available to homeowners by their lender. If your mortgage company says no or is less than forthcoming with solutions it may be time to call a HUD counselor for help. They can also assist you with calculating a budget to prevent this issue from becoming a problem in the future.

If your situation has changed so that you cannot afford the house at any more try to find a temporary solution with your lender and then think about renting it out until you can sell it (read your loan agreement carefully before doing this, as some loans forbid that you live off the property). If you do not take the steps to handle this problem, you could get yourself into a giant mess that will take years to clean up. Your credit report will take a beating and you will have trouble purchasing another home in the future.

If you have not missed a payment on your mortgage, you are still in a good position. This puts you among the lucky homeowners nowadays. Don’t hesitate to call your lender as soon as you know that your mortgage payment is going to be problem. You will likely be surprised at the level of cooperation that you enjoy with your lender. Many financial institutions are realizing that they have to be a bit flexible due to current events.

As soon as you realize that you are in financial trouble the best thing you can do is to be proactive about it. If you try to squeeze by and send in a partial payment without permission you will hurt your credit and hurt your chances of working with your lender in the future. If everyone approached problems such as these as negotiations, there would be fewer financial problems in the world. Every industry is in place to make money and they would be remiss in letting a valuable customer go because of a temporary financial problem.

Handle this in a professional, businesslike manner, remembering that the goal of the lender is to protect their investment and profit. Keeping this in mind can help you negotiate a workable solution. Remain kind, patient and be open to any alternative. As mentioned earlier, if your going to be late with your payment or can only pay a partial payment and are in good standing with your lender, you are one of the lucky ones.

You can recover from this financial hiccup and maintain your good standing with your lender and on your credit report. The sooner you call and start the process the sooner both you and your lender can breathe easy.

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Appraisal is the process in which a professional performs an evaluation of the property in question to determine the fair market value. The appraisal value may be used to determine an asking price for sale, appropriate amount of insurance to be carried, or in relation with a short-sale.


An ARM loan is an acronym for Adjustable Rate Mortgage and refers to a mortgage loan that changes with movements in the index, adjusting with a relationship based on prime. Some ARM loans have restrictions on how frequently they can adjust and by how much.


Assets refer to the property or available money, whether it is in cash, investments, materials or inventories. These assets may be called upon to pay overdue debts if the possessor attempts to go through a foreclosure or bankruptcy proceeding. The definitive factor in determining whether something is an asset is whether it has monetary value.


Assumption refers to the process in which a buyer assumes responsibility for an existing loan rather than negotiating a new loan. Assumption relieves the original owner of the loan of all of their responsibility and obligations to the property. The buyer takes over control of payments and possession of the property.


Bankruptcy is a legal process that allows a debtor to discharge certain debts in part or in full, without paying the creditor the full amount owed. Bankruptcy has severe ramifications to the debtor’s credit score and may effect their ability to get financing in the future.

Conventional loan

A conventional loan refers to any home loan other than VA or FHA. Conventional loans are secured by a mortgage or deed of trust. A conventional loan is also a mortgage with a fixed interest rate, fixed payments and a fixed term. The terms, interest and payments are all determined at the time of origination and will not change for the life of the loan unless the loan is refinanced.

Credit counseling

Credit counseling usually refers to a professional counseling service that assists people in realizing and repairing their outstanding credit debt. These services may either teach the debtor better budgeting and money managing habits or may offer settlements to creditors to greatly reduce the client’s outstanding debt.


Deed-in-lieu of foreclosure is a process in which the lender accepts possession of the property in place of the outstanding debt on the property. This allows homeowners in financial distress to escape the responsibility of their mortgage without undergoing the more significant damage to their credit that comes with a traditional foreclosure.


FHA is part of the US Department of Housing and Urban Development (HUD). FHA insures mortgage loans and sets standards for construction and underwriting. The FHA was established to encourage improvement in housing standards but is not responsible for lending money or constructing buildings.


HUD is a federal department charged with the duty of administering housing programs in the United States . HUD is an acronym for Housing and Urban Development. This agency is responsible for sponsoring subsidized housing, particularly in urban areas. HUD also provides advice and assistance to people who are facing foreclosure.

Interest rate

The interest rate is the amount that a lender charges a borrower for a loan. This rate is usually based on national prime rates, the credit standing of the borrower, the type of loan, and the amount borrowed. The interest payment is usually folded into the monthly payment of the loan and the amount that the borrower pays to interest versus principle may change over time.


A lender, in terms of a home mortgage, is a bank, savings institution, or mortgage company that offers home loans. A lender lends money to purchase a home secured with the title of the property. The money must be paid back, with interest, over a set amount of time, usually 15 or 30 years.


A liability is a debt or obligation for which a person is responsible. Debt obligations are liabilities and, when secured such as with a house, the lender or creditor has a claim on the assets of the borrower until the debt is repaid within the original terms of the loan.


A lien is a legal claim that a lender or creditor has on personal property in relation to an outstanding debt. In the case of home mortgages, a lien is placed on your property for the original loan as well as any additional loans that you may take out that are secured with the property. A lien allows the lender to seize your property if you default on your loan.

Market value

Market value is an average of the highest price that a buyer would be willing to pay and the lowest price that a seller would be willing to take on a property. This amount is usually determined by a professional appraiser that compared the property with other similar properties and their selling prices.


Principle is the capital sum borrowed, upon which interest is paid. In the case of a home loan, the principle is the amount that was originally borrowed for purchase of the home. Home owners pay a portion of the principle and a portion of interest in every monthly payment. At the beginning of a loan, the monthly charge for interest is generally much greater than the amount being paid to the principle.

Promissory note

A promissory note is a legally binding contract in which the borrower promises to pay for any indebtedness to a lender. The document is signed by the borrower and generally sets out terms of the loan such as monthly payments, interest rate, due dates and any other payment provisions.


Refinancing is a process in which the borrower takes out a new loan to pay off an existing mortgage. This is often done with home mortgage loans so that the borrower can obtain a lower interest rate, lower monthly payments, additional time to pay off the loan, or to borrow further funds against the equity of the home.


SCRA is an acronym for Servicemembers Civil Relief Act. SCRA is designed to protect active duty military members and reservists. SCRA allows active military members to take advantage of a 6% cap on interest rates for credit cards, home loans, and some student loans. The interest rate cap is only applicable during the time of service.

Second mortgage

A second mortgage is a mortgage loan granted against a property that is already indebted to a first mortgage agreement. The second mortgage produces a lien on the property that is secondary to the first mortgage. If the borrower defaults on the loans, the second mortgage will only be paid after the first mortgage is paid in full. Because the loan is less secured, the interest rate is likely to be higher.

Short sale

Short sales are an option to some homeowner who are facing foreclosure but whose property is worth less than the amount owned on the property. A short sale is an agreement between the borrower and the lender that allows the borrower to sell the property for less than is owed without having to pay back the difference to the lender.


VA stands for Veterans Administration, a federal agency that assists veterans in entering the housing market. The VA guarantees housing loans to veterans and enables them to buy residences with little or no down payment.

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Credit counseling may help you in avoiding foreclosure

Tragically, many families lose their homes unnecessarily simply because the owners didn’t know what to do when financially troubled times hit. Sometimes, however, in trying to do the best thing, the debtors accept the first help offered; help that turns out to be from a credit-counseling agency that takes advantage of the already debt-stressed individual and ends up doing more damage than good. It pays to know the difference between a reputable, non-profit agency that can be of significant assistance and one that can further damage your ability to avoid foreclosure.

Many credit counseling agencies, some even claiming to be non-profit, are designed to do nothing more than protect the interests of the credit card companies. The debt that is accrued through the use of credit cards is “unsecured.” This means that the lending institution behind the card can’t repossess anything to mitigate their losses when the cardholder doesn’t pay. You will want to avoid a so-called credit counseling agency that solicits subscribers with the lure of keeping the collection agencies away, protecting credit scores, and negotiating forgiveness of certain fees or charges with the creditor. They not only are paid a hefty fee by the person with the financial problems, but also are paid an additional percentage from the credit card companies for collecting on their delinquent accounts.

The type of debt in a home mortgage is “secured” which means that the lender can take back the borrower’s home if payments are not made according to the schedule laid out in the mortgage contract. The work many credit counseling agencies do toward collecting unsecured accounts will only worsen the subscriber’s ability to protect his home by diverting funds away from where they are needed the most. Fortunately, finding the appropriate help simply takes knowing what to look for.

The following web sites from trusted sources offer listings of agencies in your area that have been evaluated to be reputable and non-profit:

Managing your money intelligently begins with making well-informed business decisions. A good counselor will respect you for asking questions and will have answers that he/she is proud to give without making excuses. Every item on the following checklist of issues to address will be very easy for an honest counselor to answer. If the counselor has any difficulty providing answers or puts you off by claiming to need a check or promising to get back to you later, you should be alarmed that this is probably not someone that it would be wise to work with. Plan on interviewing at least three agencies before you make a final decision regarding which one is most appropriate for your needs.

  • A reputable counseling agency should have professional affiliation such as with the National Foundation for Credit Counseling (NFCC) or the Association of Independent Consumer Credit Counseling Agencies (AICCCA) and must be licensed to conduct business in your state.
  • Ask about how the counselors are trained. It is important that counselors have received education through professional organizations or schools, not merely be trained by the company they are working for.
  • A reputable agency will send you free information about itself and the services it offers before requiring that you provide any personal information other than a mailing address . It should also be willing to include free educational materials at your request. If it doesn’t, you should go elsewhere.
  • Ask the agent to explain all the types of services the agency offers. Does it include education in budgeting and managing savings separate from participation in other services? Avoid agencies that only make additional services available as part of an agreement to subscribe to their Debt Management Plan, or if they won’t discuss these offerings until they have analyzed your financial situation.
  • Obtain a complete price quote in writing. Ask about any set-up fees and additional monthly fees. Be sure that all the verbal promises made to you are included in this price quote. If they aren’t, you can’t count on receiving them. You should expect to pay around $75 for a set-up fee and monthly fees should not exceed $40. If the agency charges more, you would be smart to continue shopping for a different provider.
  • Find out how the agents are paid. In some agencies staff members earn more money if they get you to make a donation to the center or if they get you to pay for additional services. Doing business with an agency that pays their agents in this manner is not in your best interest.
  • Ask what will happen if you can’t afford to pay their fee. A reputable non-profit agency will offer to work with you to make their services affordable.
  • Your creditors should receive 100% of the money you pay to them through the agency. None of this money should be directed anywhere else.
  • Also ask about what the agency does to protect the confidentiality of your information. Will your address or any other personal information ever be sold or shared? Family financial matters are private and your identity should be safeguarded.
  • Do not sign a contract or agreement until you read it completely. Take it home so that you can review it at your own pace, without feeling rushed or with the distraction of someone talking to you while you are trying to review the details. Make a list of questions you have and follow up by asking for an explanation in a second meeting or phone call later. Smart money management starts with never signing anything that is not completely understood.

After you have interviewed and selected an agency to work with, follow up by checking for possible complaint records with the Better Business Bureau at , or with your state’s Office of the Attorney General. They will be able to tell you if complaints have been registered against the agency and whether or not they were resolved.

A good credit counselor will help you to prepare a budget and direct you to other organizations that may be able to help you extend your resources. He/she will help you understand what expenses are most important and explain how to prioritize your payments in order to serve your own best interests. The development of a step-by-step plan covering your total financial picture is an essential tool for your success.

In an effort to help you avoid foreclosure, the credit counselor will probably want to discuss some mortgage payment options that you might not know are available to you. Even if you haven’t lived in your home for a long time, you may be in a position to negotiate more manageable terms with the lender.

Over the last several years, adjustable rate mortgages (ARM) were offered with very low interest rates that would be raised periodically. While they may be beneficial to people expecting their income level to increase each year in an amount that would comfortably cover the higher cost of their house payments, the reality of our current economy is that wages have failed to keep pace with these rising interest rates. If you have an ARM that is going to result in payment levels that are beyond your means, your credit counselor may suggest mortgage restructuring. Your lender may have the power to temporarily freeze your current interest rate and adjust the schedule of increases in order to help you avoid foreclosure.

If your mortgage carries an interest rate that is higher than what is currently being offered, a credit counselor may be able to help you negotiate with your lender for a lower interest rate. This would involve making an amendment to the current contract. Lenders who are willing to renegotiate a new interest rate are generally not going to go as low as the current rate, but this is a simpler and less expensive process than refinancing.

Fixed rate mortgage interests rates were running higher than 10% in the early 1990’s. If you purchased your home at that time, your interest rates are likely to be considerably higher than the currently available rates of less than 6%. Your credit counselor might suggest refinancing if it would significantly reduce your payments. This could be helpful but if you do not remain in that home long enough to recover the closing costs, the expense associated with this option may outweigh the benefit. You should also be aware that if the appraisal reveals that your property value has decreased, the home might not qualify for refinancing. Unfortunately, this will leave you out-of-pocket for the appraisal fee.

A reputable, non-profit credit counseling agency can only educate and offer guidance. It is up to the individual to take positive action by developing and following an informed plan to avoid foreclosure and reclaim a state of financial well being. Success rarely happens accidentally.

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Overview of Foreclosures

Thanks to today’s tough economic times, foreclosures are making headlines in cities throughout America . Many financial situations can cause foreclosures – loss of a job, divorce, high medical bills, even simply taking out the wrong kind of loan. Whatever the reason, more and more homeowners are facing the loss of their homes due to foreclosure.

When you take out a loan from a bank, mortgage company or other lender – usually to buy a home — the lender has a security interest in the property. This means that if you can’t make the mortgage payments (or the property taxes), the lender has the right to foreclose, or take the property to satisfy the debt. Sometimes the lender may keep the property, but usually it’s sold to pay off the loan. In either case, you lose whatever rights you had to that property.

If you are facing the possibility of foreclosure, it’s extremely important for you to know the individual laws of your state. The timeline below gives a general overview of the process, and most states follow the same guidelines for the first three months. After that, though, the steps can vary.

Foreclosure begins when you don’t make your loan payments on time. Technically this process can begin the very first month that payments are late. If a payment is not made by the due date, it’s considered delinquent. Once a payment is late, or once any grace period has ended, the lender will start calling you to find out why payment has not been received. A late fee is often assessed after any grace period ends.

If the payment is 30 days late, the loan is considered in “default.” This is noted on your credit report and will negatively affect your credit score. A second letter is sent notifying you that you have breached the terms of the mortgage contract.

If the loan is 60 days past due, the lender can begin acceleration procedures. At this point the lender can require that the past due balance be paid in full (with interest and late fees), refuse to accept partial payments, or void any payment agreement and require the loan to be paid in full. You will receive a “Demand Letter” or a “Notice to Accelerate” notifying you of these decisions and stating that foreclosure is the next step.

Depending on the state, formal foreclosure proceedings begin when you have missed payments for three months. At this point you will receive a formal letter, called a “Notice of Default,” notifying you that foreclosure has begun. Your mortgage is considered seriously delinquent at this point. The lender will refer the matter to its foreclosure department; depending on the company, they may handle it internally or hire a local attorney or a third party to initiate foreclosure proceedings.

There are several different forms foreclosures can take, depending on what your state laws specify: judicial foreclosures or non-judicial foreclosures . Some states allow both forms, but one will be more commonly used. Although the end result is the same, one major difference is in the timing; a judicial foreclosure can take up to a year to complete, while a non-judicial foreclosure can sometimes be completed in as little as two to four months.

Judicial foreclosures take place in the court system. They begin with the lender (referred to as the plaintiff) filing a complaint against you (referred to as the defendant) and recording a notice of Lis Pendens. This is a notice stating that the property is in foreclosure; it prevents you from selling or refinancing it until the proceedings are completed. The complaint will state what the debt is and explain why the lender should be allowed to foreclose and take the property. You will receive notice of the complaint by mail, publication or direct service.

Once you have been notified, you must file a formal written legal Answer to the complaint, usually within 30 days. This gives you the opportunity to respond to the complaint, admitting, denying or explaining the allegations. All parties to the action must receive a copy of your Answer, and you will be charged a filing fee by the court.

Each party has time to collect supporting evidence, subpoena documents and conduct depositions before a hearing takes place. A judge or magistrate will preside and consider all the evidence and legal arguments. The lender will try to prove that you knowingly signed the mortgage agreement and that you have defaulted on the terms. If the judge finds the lender’s argument valid, he or she will rule in favor of the lender, issue a judgment for the total amount owed, including court costs, and authorize a sheriff’s sale of your property.

In many states you have a specific period of time between the date of the official order and the sale date to redeem your property by paying off the loan. This is known as the “redemption period.” Most homeowners are unable to do this, however, since it requires the payment of the loan in full, not just resuming the monthly payments.

A sheriff’s sale is a public auction open to anyone, conducted by the sheriff or a deputy. You will be notified of the sale date by mail; in some states a notice is also attached to your door. The sale notice must also be published in the local legal newspaper or in a general circulation newspaper for either three or four consecutive weeks (again, depending on the state). The sale is held in a public place – usually at the courthouse, but it can also occur in front of the property being auctioned.

At the sheriff’s sale, the property is sold to the highest bidder, which may be the lender or an outside party. The court confirms the sale, and then a sheriff’s deed is prepared and delivered to the new owner of the property. If no bids are received, the lender takes ownership.

After the sheriff’s sale, in some states you enter a second redemption period, where you again have the opportunity to redeem your property by paying the total amount owed, interest, court costs, attorney fees, title search fees and appraisal fees. If you are able to redeem your property, you will need a “Satisfaction of Judgment” from the lender, which states that you have paid off the amount owed and reinstated your rights to the property.

If you have not redeemed the property, once ownership is transferred you must vacate the premises. If eviction proceedings are needed, an eviction hearing is usually held within two weeks. You have ten days from the conclusion of the hearing to leave the property.

In a judicial foreclosure, if the sale of the house doesn’t bring in enough money to pay off your loan in full, the lender can obtain a deficiency judgment against you. This means that you are personally responsible for the difference between the loan balance and the sale price; the amount is considered a personal debt. This possibility should be discussed carefully with your attorney.

A non-judicial foreclosure takes place outside the court system. The lender claims the legal right to your property and has it sold at a public auction. Since the courts don’t oversee the process, a specified trustee is responsible for following the rules mandated by your state’s laws. The main advantage of a non-judicial foreclosure is that the lender is usually not allowed to obtain a deficiency judgment against you, no matter what the final sale price of your home is.

Typically, the non-judicial procedure begins when the lender asks the trustee to mail you a “Notice of Default and Election to Sell.” This legal document is your official notice that the foreclosure process has begun and that the lender intends to sell your home. The document may also be recorded at the county courthouse.

At this point your redemption period begins, as explained in the judicial foreclosure section, and you have the opportunity to stop the foreclosure process by contacting the trustee and informing him or her of your intentions. Most lenders will not accept partial payments, so you will likely need to pay the entire loan balance. By law, the trustee must inform you of the exact amount you will need to pay. If you are able to pay it to the trustee, the foreclosure must stop immediately. You will then receive the trustee’s notice of termination of foreclosure.

If you do not redeem the property, a Notice of Trustee Sale will be mailed to you, published in legal publications and recorded with the county. This specifies the date and time your property will be sold. After the legally specified time period has ended, a public auction is held and the high bidder takes ownership of the property.

Notification rules vary from state to state. Some states do not require a Notice of Default be sent to the homeowner; others require only the publication of the Notice of Sale. It is important for you to know the specific guidelines of your state.

A foreclosure, as well as all the late or missed payments that led up to it, will remain on your credit report for up to seven years. It will be very difficult for you to obtain credit in the future. Remember, however, that you have the right to have explanations entered into your credit report; if the foreclosure was due to circumstances such as unemployment or serious illness, be sure your credit report includes this information.

If you’re facing foreclosure, there are many organizations that can help you navigate the rough waters ahead. Contact someone at the first sign that you might need help.

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Dealing with possible foreclosure – an overview

If you’re facing money problems, the last thing you want to think about is the possibility of losing your home. Yet foreclosure is a real – and scary – consequence for many people these days.

One of the most important actions you can take right away is to contact your lender as soon as you are, or think you might be, in financial difficulty. Don’t ignore phone calls or letters, hoping that the problem will go away or worrying that the lender will immediately foreclose on your home. For the most part, lenders want to keep you in your home, and they may have options available to help you extend or refinance your mortgage with better terms.

If your financial problems are temporary, you may be able to work out one of the following options with your lender:

  • Reinstatement – The lender accepts the total amount owed in one payment on or before a specific date.
  • Forbearance – The lender reduces or suspends your payments for a short period of time. This option can be useful if you know you’re going to get enough money in the future to bring your payments up to date.
  • Repayment plan – The lender allows you to resume your regular monthly payments plus a portion of the past due amount each month until you’re caught up.
  • Mortgage modification – The lender changes the terms of your original loan to make the payments more affordable.

Although it may appear to be the most devastating option, giving up the property is sometimes the best solution available to you. If you can’t afford to stay where you are, throwing a lot of money into trying to save your home in the short run doesn’t make sense.

There are still options open to you if you think you cannot keep your property:

  • Sale – The lender will give you a specific amount of time to sell your home and pay off what you owe.
  • Short sale – If you can’t sell your home for the full amount you owe, the lender may accept less.
  • Deed-in-lieu of foreclosure – The lender takes back your property and forgives your debt.

Personal bankruptcy is usually considered the option of last resort. A bankruptcy will stay on your credit report for 10 years, and may make it difficult for you to obtain credit, buy another home, or sometimes even get insurance. In a Chapter 7 bankruptcy, all debts are discharged, but you may lose your home anyway. In Chapter 13 bankruptcy, the court will approve a repayment plan that may allow you to keep property such as your home or car, while you pay off your creditors over three to five years. A qualified bankruptcy attorney can help you determine whether this option is right for you.

Before you reach the point of deciding whether you can keep your home, be sure to take advantage of many organizations in your community that can guide you through this process and help you with financial and housing decisions. In addition to talking with your lender, look for a housing counseling agency. A qualified housing counselor can review your financial situation, discuss a workout plan with you and your lender, negotiate on your behalf, and refer you to other community resources for any additional assistance with problems you’re having. The U.S. Department of Housing and Urban Development (HUD) maintains a list of national and regional housing counseling intermediaries at or by phone at (800) 569-4287.

Another resource that can help you is a nonprofit consumer credit counseling agency. Counselors at these organizations can negotiate lower or long-term payments with your creditors, which might help you come up with the additional money you need to pay your mortgage. Trustworthy credit counseling agencies provide services at no cost or charge just a small monthly fee that is tied to a repayment plan. The National Foundation of Credit Counseling can refer you to a local member agency; visit or call 1-800-388-2227.

Before you contact any organization – or your lender – for assistance, you’ll need to pull together some documents that will help explain your financial situation and assets/liabilities. These include:

  • Pay stubs
  • Benefit statements from Social Security, unemployment, retirement, public assistance, etc.
  • Tax returns
  • A list of all your assets and financial resources
  • A list of your household expenses (food and utilities, for example)
  • Credit card statements

Your counselor will let you know how many months’ or years’ worth of documents you need to bring in.

These documents will help the credit counseling agency or housing counselor assess your financial abilities, work out a monthly budget and show how much money you have available to meet your obligations. Often, this personal financial plan can help you and your counselor decide on the best option for your mortgage.

Difficult situations such as potential foreclosures seem to bring scam artists out of the woodwork. Be prepared to receive all kinds of phone calls and letters from individuals and companies claiming they can restore your good credit, rescue your home and pay your mortgage. In reality, you’ll likely end up with no home and destroyed credit.

A legitimate company will not solicit your business through high-pressure direct marketing or make upfront promises. The company’s representatives will explain everything clearly, put all agreements and contracts in writing, and will welcome your desire to consult a lawyer, family member or other expert resource to help you make informed decisions. The Better Business Bureau, an attorney, your lender, or a nonprofit credit/housing counselor can advise you whether a company or offer seems “too good to be true.” Be sure to check with one of these resources before you sign any contract.

The common thread in all of these options is good communication. Don’t wait for your problems to compound before taking action. Contact your lender at the first sign of difficulty, and contact your local credit and housing counseling agencies for additional help. There are many resources available that will provide the expert guidance you need to help you through this difficult process.

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Know Your Mortgage Rights

When a purchaser fails to meet the obligations of a finance contract for a home or other piece of property by missing payments, the lender has certain rights that allows him to assume ownership of the home. This action takes place through a legal process known as foreclosure.

If you don’t make timely payments toward your mortgage contract, you are at risk for foreclosure. Before you do anything else, you should carefully read every word of the paperwork you signed at the closing for your property. That paperwork will inform you of your specific rights.

Because each state legislates its own laws regarding lending practices and each lender has its own system of applying those laws, what you learned from the experience of another person may not be applicable to your case. By including the details of your agreement on paperwork that you signed, the lender has fulfilled his obligation to tell you what your rights are and it is likely that he will not go out of his way to tell you again. It is your responsibility to read them to find out what you need to do in order to retain your rights to the property you have been paying for.

The following rights, among others, are typical in most states:

A limited amount of equity protection is provided by some states if the foreclosure is due to being sued for a debt that is not related to the house. Contact an attorney to handle this complicated process.

You may have the right to be informed whenever court action occurs on your case. To claim this right, it is essential that you file papers in a timely manner. In some states, filing these papers has additional ramifications so it is advisable to obtain legal advice from your housing office, an attorney, or the court’s pro-se office before taking this action.

Unemployment or underemployment protections are offered in most states. You must file for this protection within a strict time period defined by the state. A new law requires that your creditor inform you that you are entitled to receive financial counseling if you are not employed. This counseling will advise you of all the rights specific to your state of jurisdiction and help to find emergency assistance when it is available. In some cases, you may be eligible to apply for protection from foreclosure for a certain period of time, often up to six months.

If the complaint filed against you contains information you believe is incorrect or misleading, you have a right to answer to the complaint in a written submission to the court. Additionally, if you believe that you are exempt from the complaint due to special circumstances, you have the right to include an explanation in your answer to the court. In doing this, you will also be required to provide all involved parties with a copy of your answer and certify to the court that you have done so. The time allowed to do this is very brief, however, and if you do not file within the given time, you will lose your right to defend your position.

If you fail to move out within the allotted time after a foreclosure has been permitted by the court, the mortgage holder has the right to eject you. You will receive notification of eviction, sometimes only 24 hours before the fact, then a Marshall and movers will physically transfer all your belongings to storage. Please note that the movers are not obligated to treat your possessions with any degree of care, their only responsibility is to empty the house. You have a right to claim your belongings within a specified period of time, which is usually not more than two weeks, before they can be disposed of by the city, town, or county that has jurisdiction over the process.

If you have a FHA, HUD or VA mortgage, you may have additional rights. Contacting the HUD office to have these rights explained to you is your own responsibility and is highly advisable.

Your mortgage agreement papers contain information regarding the rights and responsibilities of both parties. It is your responsibility to review this document in order to protect your rights.

The next most important thing you need to know is that you must not ignore any correspondence from your lender. It is easy to throw away a letter and claim you didn’t receive it, or hope that by not opening it, you will avoid responsibility for its contents. However, federal laws protecting the mailer prevent a judge from accepting this excuse. While the information may be upsetting to you, knowing what is in the letter will help you understand what actions are required to proceed in your own best interest. Also, information given in one letter may not be repeated in subsequent correspondence, so it is important that you open and read everything that comes to you. Keep all correspondence you receive in a file for future reference.

In these difficult times, most lenders don’t want to take your home. While they aren’t in the business of giving their money away, it is generally more practical for them to work with you to get you through a difficult time than to take possession of your property and have to sell it to someone else. If you anticipate falling behind in your payments, you are protecting yourself by contacting your mortgage company as soon as possible. Their contact information can be found on your mortgage statement.

Lenders have a set of options they work with to help the borrower retain his/her home if it is likely that current difficulties are temporary. When you contact your mortgage company, being able to describe the full impact of your circumstances will be helpful. The lender will want to know the reason you will be falling behind in your payments, and what the expected duration of the delay will be. If the lender believes that recovery to your former financial condition is likely and that positive actions support your stated intentions, they may be willing to create a special forbearance in which your payments may be reduced or even briefly suspended.

In addition to looking at the cause and duration of your financial problems, the lender is going to examine what tactics you are utilizing to emerge from troubles. Saving money by disposing of other assets, reducing “luxury” spending on entertainment, and working to secure addition income will help your cause. For instance, if you can show that you have sold your recreational vehicle, cancelled your cable television subscription, and secured a second job, the lender will have less to question with respect to your motivation to provide sincere effort toward managing this situation.

It is certainly in your best interest to prioritize your bills. A mortgage loan is a “secured” debt, which means that if you don’t make your payment, your home can be taken away from you. Credit card obligations are usually “unsecured”, meaning the debt does not give the lender a claim to anything you have used the credit to purchase. Therefore, if it comes down to a choice between the two, be sure to make your mortgage payment first. Other items of higher priority would include your medical and automobile insurance premiums and your utility bills*. Remember that most states require a currently effective auto insurance policy to legally operate a motor vehicle. When your car is your only means of transportation to employment, it would be counter-productive to let this policy lapse.

*Some communities have assistance programs for utility expenses. Since current utility bills can often come close to equaling a mortgage payment, apply for any help that is available. Information may be printed on your monthly bill or through a community services agency in your town.

If your lender decides that your chances at recovery are not within their definition of a reasonable amount of time, you will need to explore mitigation options. Be very careful in your consideration of the alternatives. Some may appear to be beneficial, but will end up being a scam or, at the best, not quite what you thought they were.

Depending on how much you equity you have in your home, your lender might be willing to refinance the home to lower payments by extending the duration of the loan period. In certain circumstances, lenders are willing to forgive a portion of overdue payments and refinance the remainder of the debt into more manageable payments. These tactics are rarely offered, but are often worth requesting before taking more drastic measures.

At some point, an owner might look at what has to be accomplished in order to keep the property and decide the situation is hopeless. This is a costly decision with far-reaching implications because it effects your credit rating. To minimize the impact, you should first offer the lender a deed in lieu of foreclosure. In other words, to save your credit rating you willingly sign over the home in exchange for a pardon of the debt. The lender’s business policies and practices govern acceptance of this option and most larger companies will refuse, but it is definitely worth asking for.

You can also try to sell the home before the lender forecloses on it. If you believe you can sell it quickly and haven’t missed many payments, contact the mortgage holder and find out what their restrictions are regarding a sale for less than the amount owed. Many lenders have policies in place that will allow this to some degree in order to minimize their own risk. This effort also pays off by protecting your credit rating.

If you are determined to stay in your home and the lender isn’t willing to work within your current means, you can sell the house to a trusted friend or family member who will lease to you with an “option to purchase” agreement. Be aware that some states have strict laws governing this type of transaction. It is best to contact an attorney in your state if you want to enter into this type of contract. This is also somewhat risky because the purchaser usually retains the right to evict you and resell the home to someone else, but if the arrangement works out, you can avoid negative impact to your credit rating and at some point may be able to regain ownership.

Eventually, companies not related to your mortgager will approach you with offers to protect you from foreclosure. Do not sign anything without first consulting a professional. These companies are generally working for their own profit, not your best interests, and they charge significant fees to provide you with information and services that are available for free from HUD or your lender. Sometimes the documents these companies ask you to sign in a claim that they can represent you to halt a foreclosure are, in reality, a title transfer that simply gives your home to them and leaves you with nothing more than a rental agreement.

After your home has been foreclosed and you have moved out, the house will be sold. If the price obtained is less than the total amount of debt, you will owe the difference minus any discount amounts provided by the law under certain situations. You have a right to be present at this hearing and to offer an argument to contest the deficiency and/or the home’s appraised value. If you fail to appear, or if you fail to convince the court that you don’t owe the amount in question, a deficiency judgement will be issued against you.

Ultimately, the best defense in the foreclosure process is to be aware of both your rights and your responsibilities, then to follow through in a timely manner. Seek out the help of professionals when needed and be mindful that quick fixes are often not the best solution.

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