04 Apr Your House Is In Foreclosure: What Should You Do? Part Two
In Part One, I discussed some of the options you may consider when your house (or other property) is in foreclosure, namely mortgage modifications and short sales. This post will focus on whether a deed in lieu of foreclosure, or a Chapter 13 bankruptcy may be the right move for you.
A deed in lieu of foreclosure is pretty much what it sounds like–you agree to deed your property back to the mortgage company, and they agree to accept that deed in satisfaction of some, or hopefully all, of the debt you owe them. A deed in lieu of foreclosure has some of the advantages of a short sale without the time and trouble of trying to market the house. It will keep a foreclosure off your credit report,* and it may save you the embarrassment of a public sale of your property. A deed in lieu obviously doesn’t allow you to keep the house, and it is only available if there are no other liens against the house. So, if you have an equity line, or if there are tax or judicial liens outstanding, your lender is not going to accept a deed in lieu, since doing so would effectively subordinate their position to those other liens. The other questions you have to deal with is whether the deed in lieu is in full satisfaction of the debt or not. Most that I have dealt with are in full satisfaction, and I generally recommend to my clients that they only issue a deed if it satisfies the debt in full. I have seen a couple of alternatives to that. In one scenario the lender and the homeowner agree on the value of the property, and establish a deficiency based on that value. It is somewhat arbitrary, but at least you know what you are getting into. So for example, if the total outstanding debt is $250,000, and you agree that the property is worth $240,000, the deed in lieu in that situation would leave a balance of $10,000 outstanding (the “deficiency”), and the lender and the homeowner may further agree how that is to be paid. In the other scenario, the lender and homeowner agree that the property will be marketed for a period of time, and the eventual sales price of the house will determine the deficiency. That is less arbitrary, but leaves a lot of variables outside the control of the homeowner–how do you know the lender will market the property effectively, or won’t sell at a bargain price, or won’t turn down reasonable offers? And if disputes arise, how will they be resolved? As I said, I don’t really like either solution, and generally recommend against a deed in lieu unless it is in full satisfaction of the debt.
Chapter 13 bankruptcy has one distinct advantages over short sales and deeds in lieu–it allows you to keep your home. Chapter 13 also has some distinct advantages over a mortgage modification. It stops a foreclosure, and it is, in some ways, a sure thing. You know going in what you are going to have to do. It has one very important difference from a mortgage modification, however: it does NOT change your mortgage payment. And here is what I think anyone considering a Chapter 13 to stop a foreclosure should consider–how did you get behind on your payments in the first place? If you got behind because of an interruption in your income, like an illness or a temporary layoff, Chapter 13 may work really well for you. If you got behind because you were trying to pay too much in other debt, like credit cards or car payments, Chapter 13 may be a good solution. Chapter 13 can also sometimes help deal with a second mortgage by restructuring or eliminating that mortgage. But, if your mortgage payments got behind because of a permanent downward change in your income, it may not be a good fit. Chapter 13 works by giving you time to catch up mortgage payments, but generally you will go back to making your regular mortgage payments. Judges in Chapter 13 cases are prohibited from changing the regular mortgage payment on your primary residence, so if your goal is the reduce that payment, Chapter 13 is not your best option.
One final note that many people overlook–you don’t really have to limit yourself to one option. Many people file a Chapter 13 to stop a foreclosure, and then pursue a mortgage modification while in Chapter 13, without the time constraints caused by a pending foreclosure. You can also market you property for a short sale, and offer a deed in lieu at the same time. And, you can certainly try a Chapter 13 and decide to give up your home if you continue to struggle, and either stay in the Chapter 13 to restructure other debt, or convert your case to a Chapter 7 to discharge those debts if that is in your best interests. Other permutations could exist to suit your individual circumstances.
Explore your options with an experienced bankruptcy lawyer in your area, and give yourself the benefit of time and flexibility. Being prepared is half the battle when you are trying to save your home from foreclosure.
*Although it is beyond the scope of this article to discuss the full effect of these options on your credit report, note that neither a deed in lieu or a short sale protect your credit from any damage at all. But, the damage may be less in the case of a short sale or deed in lieu, since you are cooperating with your lender to resolve the problem.
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