Over the last few years, all you have to do is turn on the news and hear about the housing crisis. The foreclosure rate continues to rise and experts say there is no end in sight. Homeowners in this situation have only a few things they can do to stop foreclosure. When a debtor defaults on their loan payment, the lender will step in and repossess property. A homeowner needs to take steps to stop foreclosure efforts by the lender before the property is sold at auction. Mortgage companies and banks are not in the real estate business, buying and selling property, they expect to be paid what they're promised. The way a bank makes money is charging interest on a loan secured by the property. If the debtor defaults on the loan the bank has a right to foreclose on the property and resell it to get their money back. Banks don't want to foreclose on homeowners because the loss affects their bottom line.
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For someone who is dead set against filing bankruptcy, there are only a few options to stop a foreclosure. The first way would be to try and get a loan modification. The only problem with this is the foreclosure proceeding continues on as the debtor applies for the loan mod not knowing if they are going to get it. Recently, a news agency reported that only 10% of all loan modifications went through. That is not very good odds to risk your family home on. If you can't get a loan, the only other way to stop a foreclosure outside of bankruptcy is to sell the property. When you can't afford the mortgage, most professionals will say, sell it. In today's market there is a problem with this idea, many people are upside down on their homes, owing more than it's worth. Added to that, many have seconds and lines of credit against the property also. The problem is you will have to sell the property for less than you owe on it. If you can't afford to make your payments, you obviously don't have the money to make up the negative difference. To sell the property, you will have to get the bank to agree to a short sale, or in other words accept a lower total amount than what is owed on the property. Most people think that going this route, because the bank agreed to it, will just wipe out their mortgage. In actuality, the short sale will affect your credit similar to that of a foreclosure or bankruptcy filing. Most lenders also will send you a 1099 on the difference between what was owed and what the bank accepted. This will add a tax bill to your troubles.
Every day on the news, you hear about thousands of people choosing to walk from their homes because they owe more on them than they're worth. Most states allow the lender, if they choose, to get a judgment against the debtor for the loss they suffered because the house was sold at a reduced amount. This amount can include the interest, the late fees, auction costs, court costs and legal fees. You could see how this amount can run up in the high thousands easily. The deficiency will allow the lender to get a judgment and attach any future wages, while trashing your credit. This is why filing bankruptcy is the best way to stop foreclosure. In a Chapter 7 bankruptcy any judgment or deficiency would be included and would be wiped out in the discharge. If you want to keep the property, a Chapter 13 bankruptcy will allow you to get caught up on the arrears and in many cases eliminate seconds and lines of credit against the property. A Chapter 13 will allow you to have your bankruptcy attorney negotiate the debt, allowing you to pay it over a 3 to 5 year payment plan. This is why bankruptcy is king when it comes to foreclosure. The automatic stay of the bankruptcy will also stop any collection efforts upon filing. This gives the debtor a chance to regroup and decide whether it's feasible to keep their house or let it go. Whatever you decide, it's a good idea to get a consultation from a bankruptcy attorney to see if bankruptcy will work for you.
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