Foreclosure Options

QUESTION: WE DON’T HAVE THE MONEY TO CATCH UP ON OUR PAYMENTS. WHAT ARE OUR OPTIONS?

ANSWER: There are basically only FIVE OPTIONS you have for stopping the foreclosure.

1) BRING THE PAYMENTS CURRENT.

That means, either save money, borrow money, or sell assets to gather the cash needed.

Let’s look at this realistically. You have a total of 111 days before the lender can legally sell your home. If you are able to save money in that time, great. But haven’t you been trying to do this when the payments first fell behind? And aren’t the legal fees and late fees adding up, and actually putting you FURTHER from getting current? If that’s not bad enough, once the lender takes the next step, which is posting the NOTICE OF SALE on your door for the world to see, they can charge you up to $2,500 to do this. Unfortunately, while you’re chasing the carrot of getting current on your mortgage, the lender is chasing you with a stick by adding on more and more fees. Do you even know how much you would need to save in the next 111 days? Do you know the total amount for certain? Do you have it in writing? And how do you prove they accepted your payment in time to be sure the foreclosure has been stopped?

Also, if you’ve fallen behind on your mortgage, you’ve probably fallen behind on most other bills. If you are able to save thousands of dollars, do you really want to part with it? Wouldn’t you rather replenish your drained savings account, to protect your family from a future emergency?

If you are able to borrow money, either as a 2nd mortgage, or from family and friends, can you really afford another payment at this time? Can you afford to lose a friend when the payment on their loan gets you back into trouble again, and this time it’s your friend you can’t pay? If you are able to sell assets, great!

But, again, would you not rather keep that money in reserve for an emergency?

2) SELL YOUR HOME.

What a choice! Your home is your castle. Will selling your home be more disruptive to your family than trying to work something out on this house? Will your children have to re-adjust to a new school in a less expensive neighborhood? Will you have higher childcare or transportation costs if you change neighborhoods?

If you wanted to sell, would it even be possible? You need to ask yourself these critical questions:

Do you have time to COMPLETE the sale and close the escrow, within 111 Days? (Most realtors are not the ones to ask about this! This is not their most important asset, it is yours! A realtor wants a sale and may try to “buy” your listing by pumping up your expectations, on both timing and price.) So lets just think this through. Average marketing time for your property can be 6 months! By the time you get this mailer you’ve been in default at least 3 weeks. Even if you’re in a hot market, lets say you start TODAY and you get a qualified buyer in 30 days and they set up to close the escrow in another 30 days. Now you’re almost 90 days into foreclosure. If ANYTHING goes wrong with that escrow, you will run out of time. What can go wrong? The buyer can have problems with their lender, with selling their home… and you won’t want to broadcast this, but you are a distress sale. A simple title company check of public records during the buyers escrow will tell them you are in foreclosure, if they don’t already know. That leaves you wide open for having to make concessions to sell! You may have to take a drastically lower price, or worse yet… they may go ahead and get their loan approved, but refuse to close, and buy the house directly from YOUR lender, after they foreclose on YOU! Even worse than that, the buyer you attract may already KNOW you’re in fore closure and just be planning to drag their feet. Does this sound like a long- shot? Think again. The foreclosure market is full of con artists ready to take control of your property and leave you stunned, shaking your head, wondering how your plan went so wrong, so fast! And time does FLY when you’re in trouble!

Will you get enough money for the property, AFTER COSTS (which amount to usually 7.5% of your sales price) to pay off your current loan, with your arrearages, late fees, penalties and legal fees which are piling up? Are you sure? Do you have an estimate from your lender showing exactly what you will owe by the end of the foreclosure? Have you seen a “net sheet” from more than one experienced realtor showing exactly what you will net at a reduced price? Why a reduced price? Again, you don’t have time to bargain, so the offers you receive may be substantially lower than your ASKING price. How much lower? Up to 10 or 20% lower.

If you sell your property, how will you rent somewhere else for as little as your house payment? Have you found a rental you can afford? Have you already been approved to rent, or will your bad credit stop you from getting another place to live?

3) REFINANCE YOUR CURRENT LOAN.

In this case, you’re “darned” if you do and darned if you don’t. IF the refinance is successful your payments will go up dramatically, and the fees can be more than your back payments! If the refinance is NOT successful, you will have an emergency and be running to the bankruptcy court to buy time, when you had plenty of time to begin with.

If you are in default on your mortgage, REGARDLESS of the reason, and you want to get a NEW LOAN now you will need to have about 40% equity. Why? For one thing, when a new lender comes into a troubled situation, they expect to get paid very handsomely for their risk. If they foreclose on you they want to make a profit. If they give you a loan they will likely charge you between 9% and 12% interest AND they plan to gobble up 10% of your hard earned equity in loan fees (10 points). If you have the equity, and can afford high payments again, you may see this is acceptable. Or, your lender may have told you they’ll try to do much better than that for you.

Its not possible, unless…They find an investor who will “loan to own”. What’s that? That’s someone who will lend you the money even though you don’t have equity, hoping you fall into foreclosure with them and they can take your home. Then how flexible do you think they’ll be if you miss a payment? If you have less than 40% equity, the question you should be asking the new lender is, “Why would you be willing to lend me more than every other single lender in the market right now? Are you trying to end up with my home?” And if they are, will they tell you the truth? (The best con artists are the ones you never suspect because they’re soooo nice.) At the very least, you should be given 3 references from grateful customers, who can tell you if the loan fees and interest rate they got were what they were originally quoted in writing. Then, call your local title company and find out if those loans really were recorded. You’d hate to be talking to the con artist’s buddy without knowing it!)

The bottom line, DON’T PUT ALL YOUR EGGS IN THIS BASKET ! It’s a long-shot at best. You probably don’t have the equity to refinance. Even a “loan to own” lender probably won’t risk it for less than 40% equity. Don’t waste time asking around to get the answer you want to hear! If a lender stands to make 10% of your loan amount, they may be tempted to drag their feet ATTEMPTING to help you. But it’s YOU who will end up with a NOTICE OF SALE on your door and 21 days to cure a problem you could have cured easily in 111 days if you just hadn’t believed them.

4) MODIFY YOUR CURRENT LOAN.

THIS SHOULD BE YOUR FIRST CHOICE! Why? This accomplishes the best of all worlds for everyone involved. The homeowner gets to keep their home, keep their low payments, avoid the court system, avoid new debt, and avoid eating into the equity they’ve worked so hard to build up on their home. And the investor gets to avoid a foreclosure.

The best loan modification will take ALL OF YOUR BACK PAYMENTS, add them to the end of the loan, and restore your normal payments again. That means, rather than paying thousands of dollars in back payments today, you can pay them at the end of your loan term, when you can better afford it. What could possibly be better than that? “But the lender says they won’t do this for us!” Yes, we hear this every day from homeowners. And that same lender will turn right around and modify a loan for us. You need us.

What’s the catch? Not everyone qualifies. You must have had a hardship which caused you to fall behind on your payments, which has now been cured, and you must be able to afford the normal payments again, along with all your other expenses. Please call our office for a confidential pre-qualification. This may be an option for saving your home.

5) FILE CHAPTER 13 BANKRUPTCY.

HERE IS ONE EMERGENCY PLAN!

A “Chapter 13” is NOT BANKRUPTCY as you know it. You are not asking to walk away from debt! You are asking the court to STOP THE FORECLOSURE and give you MORE TIME to pay the past due amount over 36 –60 months. This is basically a “wage earners repayment plan”. It is designed to allow financially troubled persons to PAY their bills, NOT necessarily wipe them out…but it does happen!

Advantages to filing Chapter 13:

A CHAPTER 13 DEBTOR IS UNDER THE PROTECTION OF A FEDERAL COURT

IMMEDIATELY STOP THE FORECLOSURE
GET UP TO THREE TO FIVE YEARS TO MAKE UP THE LATE PAYMENTS
STOP REPOSSESSIONS
STOP ALL GARNISHMENTS: Including those for back child support and delinquent taxes.
STOP COLLECTION CALLS: Credit card collectors, lawsuits, and collection agencies all go away when a Chapter 13 is filed.

6) FILE CHAPTER 7 BANKRUPTCY.

HERE’S THE LAST EMERGENCY PLAN!

If all else fails and the foreclosure sale date looms around the corner a Chapter 7 bankruptcy MUST be considered prior to the sale date of your home. Why? There are several but the most important reason is the dreaded IRS.

Why? California is famous for its one-action only rule, in which a lender must carefully elect one action to take against the borrower if the borrower defaults. If the lender forecloses the deed of trust out of court (non-judicial), the lender has chosen one action and may not bring a lawsuit to recover a deficiency, which would be a second action. Such a suit is permitted as the lender’s one action and one action only. Lenders may not seek a deficiency judgment after a non-judicial foreclosure sale and the borrower has no rights of redemption Cal. Code Civ. Proc. 580b. In short…Section 580b of the Code of Civil Procedure prohibits the entry of a deficiency judgment following the sale of real property secured by a deed of trust to secure the balance of the purchase price of the property.

What does this mean? Here’s how it works. Let’s assume that the lender ended up with your home at the sale. Now, they must put it back on the market in order to get their money back. For many reasons, your home could possible sell for less than is owed and in this example the lender did lose money. And for sake of this example, the lender loses $35,000 when all the ink is dry.

In this example, you don’t have to pay the deficiency of $35,000, but the Internal Revenue Service is likely to tax you on the $35,000 you didn’t have to pay back. This sum is known as discharge of indebtedness, or DOI, income.

That’s right. Add insult to injury…not only do you lose your home but the IRS now wants to tax you on the loss to the bank and this “debt forgiven” won’t be forgiven by the IRS. The IRS considers it earned and taxable income. In fact, your debtor probably will send you a 1099 form detailing your miscellaneous income. Don’t think you’re free from the IRS if you don’t get the form. The debtor may have reported the “income” to Uncle Sam even though he didn’t fill out your part of the paperwork.

This IRS law will cost you money since the bank declares the debt uncollectible and reports it as a tax loss to the IRS. (26 U.S.C. § 108.) This is because you must report forgiven debt as income, with certain important exceptions. Debts subject to this law include money owed after foreclosure or property repossession.

Any financial institution that forgives or writes off $600 or more of a debt’s principal (the amount not attributable to interest or fees) must send you and the IRS a Form 1099-C at the end of the tax year. These forms are for the report of income, which means that when you file your tax return for the tax year in which your debt was settled or written off, the IRS will make sure that you report the amount on the Form 1099-C as income.

Now comes the good news! There are several exceptions stated in the Internal Revenue Code. For example, if the financial institution issues a Form 1099-C, you do not have to report the income on your tax return if:

the cancellation or write off of the debt is intended as a gift (this won’t happen in this case)
you discharge the debt in bankruptcy, or
you were insolvent before the creditor agreed to settle or write off the debt.

Insolvency means that your debts exceed the value of your assets. To figure out whether or not you were insolvent, you will have to total up your assets and your debts, including the debt that was settled or written off.

Examples:

Example 1: Your assets are worth $35,000 and your debts total $45,000. You are insolvent to the tune of $10,000. You settle a debt with a creditor who agrees to forgive $8,500. You do not have to report any of that money as income on your tax return.
Example 2: This time your assets are still worth $35,000 and your debts still total $45,000, but the creditor writes off a $14,000 debt. You don’t have to report $10,000 of the income, but you will have to report $4,000 on your tax return.

If you conclude that your debts exceed the value of your assets, include IRS Form 982 with your tax return. You can download the form off the IRS’s website. Completing it is not difficult.

To determine if you are insolvent, have a tax preparer calculate your tax liability. If your tax bill will be too high and you cannot prove you are insolvent, you may be better off filing for bankruptcy and discharging the entire debt.

Finally, bear in mind this fact: Even if you don’t get a Form 1099-C you’re your lender, the lender may very well have submitted one to the IRS. If you haven’t listed the income on your tax return and the lender has provided the information to the IRS, you could get a tax bill or, worse, an audit notice. This could end up costing you more (in IRS interest and penalties) in the long run.

Now, let’s talk about bankruptcy. If you plan to file for bankruptcy you need include the debt that a creditor has settled or written off. And, more importantly, most legal scholars have concluded that on the day the creditor settles or writes off a debt, a “taxable event” occurs. This means that if you file for bankruptcy after that date, you cannot wipe out the debt unless your tax debt could be wiped out in bankruptcy. What this means in English is that you should file for bankruptcy before the sale takes place to avoid the debt forgiven tax.

Advantages to filing Chapter 7:

A CHAPTER 7 DEBTOR IS UNDER THE PROTECTION OF A FEDERAL COURT

WIPES OUT THE DEBT FORGIVEN TAX TO THE IRS AND THE STATE TAX
IMMEDIATELY STOPS THE FORECLOSURE
STOP REPOSSESSIONS
STOP ALL GARNISHMENTS: Including those for back child support and delinquent taxes.
STOP COLLECTION CALLS: Credit card collectors, lawsuits, and collection agencies all go away when a Chapter 13 is filed.
WIPES OUT THE ALL OTHER DEBTS TO INCLUDE CREDIT CARDS, ETC.

For more information please visit our bankruptcy section.

SO, WHAT WILL YOU DO NEXT?

Are you are in danger of losing your home? For most people, that home represents security and peace of mind. It is also your biggest asset.

You are getting piles of offers in the mail. You are embarrassed to talk to your friends and family about being in foreclosure. You instinctively know you need help. You want someone to be experienced in saving homes, knowledgeable about ALL of your options, and capable of applying those remedies that will be best for YOU. You want to choose an advocate NOW, while you still have time to consider all your options with minimal pressure.

We treat you as an individual, with an individual problem, requiring individual attention.