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Facing Foreclosure?

Your house is in foreclosure, the mortgage company is calling you every day. They make it sound like they’re going to come and put your stuff out on the street any minute. You’ve heard about, or read about, or even applied for a mortgage modification. You’ve also heard about short sales and deeds in lieu of foreclosure. And then there’s Chapter 13 bankruptcy. So which is the right option, and how do you decide?  I’ll divide this post into two parts, so it doesn’t get too heavy.

Let’s take mortgage modification first. If you have already applied for modification, and been turned down, that should be some indication that it may not be your best option. Sometimes though, circumstances have changed, and that might change the outcome. When I’m advising clients about whether to continue to hold out hope of a mortgage modification, the first thing I look at is the equity in the property. It is very rare to see a meaningful modification offered when the client has equity in the property. In other words, and it makes perfect sense, the mortgage company is only likely to offer you a modification when they stand to lose in a foreclosure. If they’re not going lose anything, the chances are they’re not going to offer you a modification. There may be exceptions; there may be mortgage bankers out there with a heart. I just wouldn’t hold my breath.

The other thing to consider is whether you qualify for help under the federal government’s HAMP modification program, or some similar government-sponsored program. For example, under Hamp, you are not eligible for modification if your existing mortgage payment is less than 31% of your gross income. The mortgage company may let you apply, and the mortgage company may have other programs that you could qualify for. But, you’re looking to be eligible for one of the biggest, and if you’ve already been turned down, you may want to focus your efforts on another solution.

Even if you clearly qualify for help under HAMP, or some other program, you can still be turned down. The paperwork can be a nightmare, and if you’re not good at paperwork, you may just want to take a pass on the whole process. You can find any number of people who can tell you about the frustrating experience of trying to produce the paperwork a mortgage lender requires, over and over again, to no avail. Everyone that I know who has been rewarded with a meaningful modification has been extremely persistent, and has stayed on top of the paperwork. If you’re going to go the modification route, expect to have to do the same.

So when should you consider a short sale? A short sale involves your lender agreeing to take less than the full balance due when you sell the property. Obviously, it is a sale, and doesn’t allow you to keep the property. Therefore, if your goal is to keep your house, there’s not really much point in discussing or attempting a short sale.  A short sale assumes that you are underwater, i.e., you owe more on the house than it’s worth. Of course, as in most parts of the country, it’s hard to get a sale of any kind. When you add the complication of a short sale to the equation, it may be even more difficult. You have to find a buyer who not only wants your particular house, but he’s willing to wait, sometimes for an extended period of time, for an answer from the lender. I have yet to see a lender who was willing to agree to a short sale before an actual offer had been received. There are other factors to consider when trying to decide whether to attempt a short sale. In addition to the ordinary inconveniences of getting your house ready to show, and keeping it in that condition, a short sale also requires a knowledgeable closing attorney, whose willing to do some extra work to get the sale closed. It probably also takes a knowledgeable and experienced real estate agent, who’s also willing to go the extra mile. The benefits to a short sale can be significant. A short sale can keep your house out of foreclosure, and if that’s the only potential black mark on your credit report, it may be worth the time and trouble. It can also, in the rights or situation, help you avoid a deficiency, that is, knowing the mortgage company after your property is sold. Frequently, the quid pro quo for a short sale is that the mortgage company takes the sale proceeds in full satisfaction of the debt.


Bankruptcy & Timing

When a clients come to you about filing Bankruptcy it should be all about timing. Sometimes, waiting to file makes good sense and will save the debtor a lot of headaches and some significant debt. Sometimes, however, the time to file is as soon as possible.

Let’s look at six reasons to file now; and six reasons to wait:

File now when:

1. Your house is appreciating and may exceed the homestead amount if you wait;

2. Your house is appreciating and you can strip a wholly-unsecured second deed of trust now, but might not be able to in a few months;

3. You are expecting a significant raise or you just got a good job;

4. You are anticipating a change in your marital status and want this done beforehand;

5. You just want to get started on being debt-free; or

6. You want to avoid litigation or collection annoyances.

File later when:

1. You just got a bonus from work and it significantly affects your income level;

2. You are anticipating some significant medical treatment and aren’t sure if your health insurance will cover all of the associated costs;

3. You need a new car and want to pay lower interest while your credit is still good;

4. You are expecting a change in your marital status and want to wait until that is resolved;

5. You gave something of value away and need to wait until it is no longer an issue in a bankruptcy case; or

6. You have income tax debt that could be discharged if you wait the requisite amount of time.

These lists are far from complete. There are many other reasons for filing now or later.

The key here is to remember that timing is everything. Consult a competent bankruptcy attorney as soon as you can to help determine the right time to file.

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