Is Foreclosure My Only Option?
When facing severe financial issues and considering avenues like bankruptcy, you may wonder if you will automatically lose your home. In truth, while there are many options you can explore to potentially save your home, selling your home may be the best choice when you are “fully encumbered.” Fully encumbered means that your obligations on the house exceed the home’s total value, so if you sold the home today at full market value, you would still owe money on the loan.
However, there are many options available for those who are adamant about keeping the home. You can seek to delay foreclosure proceedings through many avenues, including filing for Chapter 7 or Chapter 13 bankruptcy. Know, though, that filing for bankruptcy only discharges debts; it cannot eliminate a home lien, giving your lender the opportunity to still repossess the home once the bankruptcy process has completed. For this reason, we recommend reaching a workout agreement or a mortgage modification agreement so that you can resume making timely payments in an effort to keep the home.
If you are facing foreclosure, or feel like you may be at risk for it, then it is critical to act now. Reach out to an experienced financial law team for guidance and assistance so that you can be aware of your choices, their consequences, and the best path forward.
New Mexico Financial & Family Law is available for consultation regarding bankruptcy, foreclosure prevention, and other financial matters. Our Albuquerque-based firm collaborates with a professional network of CPAs, credit counselors, and others who can work with you to help determine your best options. Call (505) 503-1637 or contact us online to set up your no-obligation appointment today.
Foreclosure Is a Real Threat, So Contact an Attorney ASAP
Once you are behind on your payments, your lender may begin threatening the prospect of foreclosure almost immediately. Many lenders will begin initiating foreclosure proceedings within three to six months after the first missed payment, regardless of whether or not the borrower continues to fall behind. After missing three months or so of payments, you are all-but-guaranteed to receive a demand letter or a “notice to accelerate” letter requesting immediate payment within 30 days.
Know that lenders do these things in order to strongly encourage their borrowers to not fall behind on payments. They have a strong motivation to retain the current mortgage agreement and make sure it’s paid off in full, and they prefer this option to repossess and then selling a house. Still, lenders will not hesitate to foreclose once their borrower is more than a few months behind on a payment, as past experience tells them that the borrower is likely to default once they are in this state.
All of this to say: take foreclosure seriously, but know that lenders are partially using it as a persuasive tool. They want to encourage you to figure out how to get caught up. This can include negotiating with them directly to settle the owed difference or modify the mortgage agreement, even if they don’t explicitly offer these options in their letter.
Commit to working with your lender and getting back in good standing once you first hear notice about being delinquent. You can work with the assistance of an attorney to determine your standing, your options, and how you can encourage the lender to be patient and negotiate rather than begin foreclosure immediately.
How Can I Stop Foreclosure?
There are only a few ways to stop foreclosure, and they should all be considered temporary. There is no way to prevent foreclosure indefinitely once you are behind in your payments unless you are in extreme circumstances related to fraud or deception in regards to your loan.
First, request that the lender delay foreclosure proceedings. Once these have started, they can be difficult to stop, so ensure that you act quickly. You may be able to get the court to order a delay, but you will need a valid justification, such as a recent injury, illness, or hardship. However, it is usually favorable to have the lender delay the foreclosure voluntarily.
Second, begin negotiating a workout or loan modification. After all, the lender wants their loan repaid – not your house! A loan workout or modification is simply a negotiated agreement between the lender and the borrower to make it possible for you to keep your house. This could involve mortgage modification, which can lower monthly payments, interest rate, principal and reducing or even eliminating fees and penalties.
If you have been the victim of predatory lending practices, you may have more options available. Loan flipping, mandatory arbitration, unfair denial of modification, and unfair penalties are methods predatory lenders utilize to extract more money from you. Cases like these are where an attorney can really make a difference in the outcome and possibly even stop foreclosure.
Stopping foreclosure is not always possible. The plaintiff, usually the lending bank, most often has the fact on their side. It is relatively easy to prove the borrower is behind on payments! In order to use this defense, you must have a reasonable basis to argue before the court. Injury or illness are appropriate issues to use in defense against immediate foreclosure. Delaying foreclosure can buy you much needed time to possibly find a new job or recover from an illness or injury.
If your financial hardship is in relation to COVID-19, you may qualify for deferment or reduction of payments for six months, and a possible further six months of relief if you hold a federally-backed (FHA) loan.
Does Chapter 7 or Chapter 13 Bankruptcy Stop Foreclosure?
Yes and no.
Yes, petitioning for Chapter 7 or Chapter 13 bankruptcy can immediately delay foreclosure proceedings if the foreclosure sale has not already begun. Once your petition has been received, the court will grant an “automatic stay” for you to work out your case and create a plan for moving forward. During this time, lenders will be forbidden from continuing with foreclosure or even contacting you about late payments.
In Chapter 13 bankruptcy, you will form a payment plan to catch up on late payments (arrears) and make timely payments into the future to resume good standing on your mortgage. Debts are not forgiven (discharged), so you will need to remain in good standing to keep your home.
In Chapter 7 bankruptcy, you will form a plan to pay off as much debt as possible, and the remaining debt will be discharged. This can include secured debt, like your mortgage, but there’s a catch: your lien still applies. Your lien gives the lender the legal right to seize the home once you default, so you will still lose your home after Chapter 7 unless you come to an agreement to avoid it.
Another issue is that in both Chapter 7 and Chapter 13 bankruptcy, you are expected by the court to sell as much property as possible to raise money to pay off owed creditors. The amount of equity you have paid into your home is considered property, so it may be possible that you will be forced to sell your home in the bankruptcy process if you hold more equity than the exemption amount allowed under New Mexico law.
So, regardless of your plan for other debts, if you intend to keep your home after bankruptcy, you will need to develop a plan. Getting assistance from financial law and accounting experts can increase the chances that this plan will be successful.
Why You May Want to Consider Selling Your Home
Intuitively — or perhaps emotionally — one would think that it is always best to try to keep your home during times of bankruptcy. It is not always the case if it is fully encumbered (that is, the debt on the house is equal to or greater than the value of the house).
Part of getting a fresh start may be walking away from a property that is a greater burden than an asset. Contact New Mexico Financial and Family Law, and we can advise you on the legal and financial ramifications of keeping your home or allowing it to default in foreclosure. Comparing and contrasting possible scenarios will give you the ability to select the choice that’s best for your financial future.
Foreclosures And Buying Another Home
Personal bankruptcy and foreclosure are not home buying deal-killers. In fact, you can often easily buy a home two years after your foreclosure or bankruptcy.
Lenders will want to know if your financial problem was caused by an explainable “one time only” circumstance — something like job loss, a failed business venture, or a serious illness. If there have been other credit problems in your history or if you just plain spent too much money, it will be more difficult to get another home loan.
The next thing a lender will assess is your bill payment record after the bankruptcy or foreclosure. It’s crucial to re-establish timely payments.
Many times, Private Mortgage Insurance (PMI) companies won’t insure people who’ve been bankrupt or foreclosed on. A larger down payment (20%) will eliminate the need for mortgage insurance. And, depending on the lender, you may be able to buy a home sooner than two years after your troubles. It’s likely you’ll pay a higher interest rate but later you can refinance, once you establish a good financial track record.
Under the new Bankruptcy Act of 2005, credit counseling and/or other options may be required. For foreclosure help, the first step is to contact a bankruptcy lawyer to find out all your legal options and rights. New Mexico Financial and Family Law is an Albuquerque bankruptcy law firm and can assist you through the legal issues of bankruptcy and foreclosures and recommend advisers to assist you in the financial details.
FHA Eligibility with Bankruptcy and Foreclosure
A credit report will be obtained from the borrower. Any late payments, collections, judgments, foreclosures, bankruptcies, etc. must have a justifiable explanation in writing by the borrower.
In the event of a foreclosure, the borrower has three years from the date the claim was paid until they are eligible for another FHA loan unless the foreclosure was the result of extenuating circumstances beyond the borrower’s control and the borrower has since established good credit.
Chapter 7 bankruptcy requires the borrower to wait at least two years from the date of discharge.
Chapter 13 bankruptcy requires the borrower to have been paying on the bankruptcy for at least one year, performance must have been satisfactory and the borrower must also receive court approval to enter into the mortgage transaction.
Get Started by Learning More About Your Options
New Mexico Financial & Family Law is experienced with bankruptcy and foreclosure matters, and we have helped out hundreds of individuals like yourself in Albuquerque and throughout the state. You may be entitled to a free consultation, get the guidance you need to make critical financial decisions regarding bankruptcy and foreclosure over the phone, or online. Call (505) 503-1637 or contact us online to schedule your consultation today.
We are a debt relief agency and have practiced bankruptcy law for a combined 50 years. Our services include helping individuals and couples file for bankruptcy relief under the Bankruptcy Code.