Foreclosure: the danger of just walking away

As the economy staggers along in its fifth year of recession, foreclosures continue to pile up across America among the supposedly well-off and struggling alike. For some, it was too much house for the budget — for others, job losses, divorce, and medical expenses have prevented homeowners from making their regular house payments. While it’s a bounty for real estate scavengers and others that make a living in real estate transactions, it’s a real dilemma for someone deciding whether to keep their home or walk away — and how to best accomplish that task.

One choice that some are making — and an ill-informed one, at that — is to simply walk away from their homes. In this instance, the lender eventually takes physical possession of the home and holds a foreclosure sale. Upon the lender’s transfer of home ownership to a third party buyer, the sales price is applied to the debt (including attorney’s fees, foreclosure costs, make-ready, etc.) and the remaining balance — called the “deficiency” — remains owing by the borrower. The deficiency may then be collected like any other debt, by lawsuit and other means. The lender may also tag you with an IRS form 1099 for “forgiveness of debt” income — meaning you may have to pay taxes on the amount of the lender’s losses. This can easily add up to thousands of dollars or more in tax liability.

A short sale — selling a property to a third party for less than the amount owed on the mortgage(s) — is sometimes attempted to avoid a foreclosure. The borrower’s motivation here is generally to avoid having a foreclosure appear on his credit report. The borrower generally receives no cash or other compensation for going through the substantial effort to market his house, and the lender gets roughly the same payment they would receive in a foreclosure, without the additional expenses. The true beneficiaries of a short sale transaction are the parties involved in processing the transaction (realtor, buyer’s mortgage broker, appraiser, title & escrow company, etc.) and the buyer, who is essentially obtaining a property at a foreclosure price without competition from other prospective purchasers. What’s more, the borrower still faces the same deficiency issues as if he had walked away — resulting in potential tax liability and collection efforts. Also, more and more creditors are viewing short sales transactions with the same negative weight as a foreclosure.

By contrast, bankruptcy provides more breathing room at the front end and freedom from the deficiency at the back end. The bankruptcy stay can provide a temporary stop to foreclosure proceedings and give you an orderly way to relocate without the pressure of an impending foreclosure and eviction. At the end of your case, your bankruptcy discharge will, in the vast majority of cases, wipe out all the remaining debt owed to the lender — with no tax liability.

Lastly, through the use of a chapter 13 bankruptcy plan, you may be able to actually stay in your house and pay the mortgage arrears over time on your schedule, rather than that imposed by the lender.

Give us a call today if you’re facing a foreclosure and unsure how to proceed.

Abuse of the Homeowner

In this article I explore how the mortgage industry abuses the homeowners before and then after a bankruptcy case is filed. Our homes are supposed to be our castles, yet if we are not careful, the mortgage companies can quickly dethrone us.

During these rough economic times, many of us can find ourselves facing financial difficulties at some point. It could be that there were unexpected medical bills, a business downturn or a loss of income. Sometimes, the mortgage “momentarily” takes a backseat to the emergencies in our life.

What we have seen practiced by some mortgage servicers is that, when a homeowner gets behind in payments, the servicer begins two processes aimed at protecting its interest in the property. On one hand, it may offer the owner an opportunity to refinance/restructure the note, and on the other hand, it may initiate foreclosure proceedings.

The difficulty for the homeowner is to understand that the loan servicer could be executing both processes in parallel. This confusion is due to misrepresentations or misunderstandings occurring during the frantic phone calls between the homeowner and the different service personnel in the servicer’s customer service department. The difficulty is made worse when the homeowner does not seek legal advice early in the process for a myriad of reasons, often involving pride in being able to handle one’s own problems.

Fortunate few, however, at some point before the foreclosure make themselves get legal advice that can save their homes. For others who try to work it out on their own, they sometimes learn after the fact that their homes were foreclosed on during the time that they were sending in the piles and piles of the paperwork required for refinancing, paperwork that the mortgage company conveniently loses.

Consulting with a bankruptcy attorney early in the process when a homeowner gets into financial distress can be beneficial more often than not. Bankruptcy attorneys can quickly develop insights into your situation and can plan actions to take so that an orderly bankruptcy process is undertaken. Most people do not like the stigma of filing for bankruptcy; however, those who truly consider all options will be more likely to come up with a better plan for getting a fresh start in life while keeping their home.

Review your cash flow situation months ahead if possible. However, if you foresee a negative cash flow situation, consider talking to a bankruptcy attorney prior to using up your savings and other resources that you and your family may need to meet your basic needs. The consultation is free and there may be other options. Until you sit down with an experienced attorney, you will not know if bankruptcy can help. Come see us.

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