Are You Facing Foreclosure?

It's all over the news; the foreclosure rate in the U.S. has skyrocketed! As an attorney, I have dealt with many clients who have ignored their financial problems until its too late. Foreclosure is a scary proposition and sometimes people allow their fear to paralyze them. Many people think that if they just ignore it, the problem will go away. Unfortunately, that's simply not true.

If you are behind on your mortgage payments, it's imperative that you be proactive. There are several things you should do. First, communicate with the Loss Mitigation Department of your mortgage company. You may be able to work out a forbearance agreement or restructure your loan.

Next, you may want to consult with a bankruptcy attorney. It is possible to stop the foreclosure and keep your home with the "fresh start" afforded through the bankruptcy process. Be aware, though, that sooner is better. With the changes to the bankruptcy laws which went into effect in October 2005, last minute filings on the eve of bankruptcy are more difficult and may raise concerns with the bankruptcy court.

There are two types of consumer bankruptcies - Chapter 7 and Chapter 13. Generally speaking, Chapter 7 relieves a debtor of the obligation to repay unsecured debt. Chapter 13 is a debt consolidation. Most people facing foreclosure want to save their homes and usually choose to file a Chapter 13 bankruptcy. In a nutshell, debtors who file Chapter 13, must submit a consolidation plan to the bankruptcy court that sets forth how they will repay the arrearage on their mortgage as well as how they will repay any other debts, both secured and unsecured. For the duration of the bankruptcy, the Chapter 13 debtor must pay their regular monthly mortgage payment beginning the first month after they file their bankruptcy petition directly to the lender. These mortgage payment must be paid on time each month. Failure of the debtor to make their regular monthly mortgage payments or to comply with any other terms of their Chapter 13 plan, may result in a dismissal of their case.

Finally, you may want to consult a realtor. If you have enough equity in your property, you may be able to sell your home and with the assistance of a realtor, negotiate a "short sale". A short sale is an agreement between the lender and the homeowner in which the lender agrees to accept less than what is actually owed on the property as a payoff on the loan. In other words, a short sale happens when, for example, a homeowner owes $90,000 on their mortgage, but the lender agrees to accept $79,000 as a payoff of the loan.

For sellers who do not have much equity in their home and do not have cash available, a short sale is probably not a good option because they would be required to bring money to the closing. Keep in mind with short sales, lenders require that the seller nets $0 at the closing. Because the lender is accepting less than what is owed on the mortgage debt, the seller cannot walk away from the closing table with a check.

A short sale is a win-win-win situation. The homeowner is able to sell the house and avoid having a foreclosure on their credit, the lender is able to avoid the costs of a foreclosure, and the purchaser, in many cases, has instant equity.

Be aware, that there are tax consequences to short sales. Any seller contemplating a short sale should consult with a tax attorney or accountant to ascertain what, if any, tax liability they may have if they sell their property as a short sale. The tax consequences on short sales of primary residences and investment properties may differ.

Rather than waiting until the last minute to try to stop a foreclosure, be proactive. Take the steps necessary to try to save your home. Even if you are ultimately unsuccessful, I think you will feel much better for having taken action, rather than allowing your fear and uncertainty to paralyze you.

For more information about short sales or for a referral to a real estate professional in your area, send an email with "Short Sale" in the subject line to sharon.smoot@coldwellbankeratlanta.com.