The moment a debtor files a bankruptcy case, the bankruptcy court issues what is called a stay order. The stay order requires all collection activities to cease against the debtor. Additionally, the stay order demands the suspension of any court proceedings until further order of the bankruptcy case. A notice of the stay is called a Suggestion of Bankruptcy and is delivered to the Clerk of the Court in which the court proceedings is known. The bankruptcy stay closes the marital estate to distribution and may have serious consequeces for legal professional who unintentionally violates the federal order. The stay may be lifted by filing a Motion and Order and attending the Bankrutpcy hearing if an objection is filed to the motion and order. Consult your bankruptcy attorney to discuss additional conflicts in bankruptcy and divorce issues.
What is a Short Sale?
A short sale is an arrangement with your lender whereby they will allow you to sell the property for less than the amount of the current mortgage.
Why would a lender permit this? Their decision depends on a number of factors: where is your house? how much loss will the lender suffer? What is the possibility that a speculator/investor will buy at a foreclosure sale?
The first step is to contact your attorney. Do not contact the lender until you fully understand the potential risks involved. Under Federal law, when a debt is forgiven, it can be treated as ordinary income on which tax must be paid. You may have to pay income tax on this amount even though you did not actually receive the money. Again, consult your attorney.
You want to make absolutely sure that even should the lender approve the short sale, you will not be obligated to make up this difference in the amount of the sale and the value of the property, which is called a deficiency. Unfortunately, most lenders will not put their agreement in writing.
Allowing the foreclosure to proceed to the auction is generally the worst choice. By doing nothing, homeowners will lose their home and any equity they have earned. Plus they will damage their credit at the same time. Moreover, some states allow lenders to go after borrowers in court for any deficit between what the house eventually sells for and what the homeowner owes. This is called a deficiency judgment. Unfortunately, many homeowners chose this option, putting their heads in the sand and hoping they’ll win the lottery and avoid foreclosure.
All foreclosure sales are between 10 a.m. and 4 p.m. on the first Tuesday of the month (regardless of holidays) usually on the county courthouse steps. The sale is conducted as a public auction with the property going to the highest bidder, who pays in cash, although the trustee may allow some time (within the same day) for the highest bidder to collect the full amount. The lender is also eligible to bid on the property.
The trustee transfers ownership to the highest bidder free and clear of any junior liens but subject to any senior liens. If the bid amount is higher than the amount owed to the lender, any surplus goes to junior lien holders. In Texas, the borrower’s right of redemption after the sale does not exist.
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1. Renegotiate with Lender
Contact your lender as soon as you know you can’t make a payment. The faster you move the more options you’ll have to fix your financial future. Borrowers may have the option of renegotiating their loan with the lender. Try to negotiate a plan that will enable the loan to be back in service. Lenders don’t want the property back; they want to keep their loan portfolio full of performing loans — not defaulting loans. Lenders say that the sooner they hear from a delinquent borrower in trouble, the easier it is to negotiate a solution.
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2. Reinstatement
Prior to a foreclosure sale, borrowers have the right to reinstate a delinquent loan. The reinstatement option gives homeowners the opportunity to make up back payments plus any incidental charges incurred by the bank such as filing fees, trustee fees and legal expenses. Paying off the reinstatement amount will cancel the foreclosure and enable the homeowner to continue to live in the home as if no default occurred. For many delinquent borrowers, however, reinstatement is not an option because they are deep in debt and cannot make up back payments, plus other expenses. Consult with an attorney because reinstatement laws vary from state to state.
One of the most overlooked foreclosure options a borrower has is forbearance. Forbearance is the postponement for a limited time of a portion or all of the payments on a loan in jeopardy of foreclosure. Partial or full payment waivers had their origins in the Great Depression. A lender expects that during the moratorium period the borrower can solve the problems be securing a new job, selling the property or finding some other acceptable solution.
Depending on your lender, you may be able to restructure your loan. For example, delinquent mortgage payments may be added to the end of the borrower’s scheduled payments or the borrower could be given more time to bring the late payment current. Some mortgage companies are able to arrange a repayment plan based on your current financial situation. You may qualify for this option if you recently lost your job. Call your lender and inquire if you meet the requirements for forbearance.
4. Redemption of the Loan
To redeem a loan, the borrower must pay off the loan in full. Borrowers may accomplish this by refinancing (with a family member cosigning perhaps) or by a friend or relative bailing out the borrower in exchange for equity or some other financial arrangement. Again, redemption rights — like reinstatement rights — vary from state to state. Most states permit redemption up to the foreclosure sale.
Texas has no statutory right of redemption after foreclosure, which would allow a party whose property has been foreclosed to reclaim that property by making payment in full of the sum of the unpaid loan plus costs.
5. Sell the Property
For owners who don’t care to save the property, or who have no other choice than to let the property go, selling the property may be a smart choice. If you have enough equity in the house to allow you to pay off the mortgage in full, then a sale is usually your best option. This option preserves your equity and what’s left of your credit score. Selling also leaves you in a much better financial position should you want to buy another home in the future. Even if you don’t have equity, you may be able to arrange a short sale, where the bank agrees to forgive the mortgage debt for less than the total amount owed on the mortgage if you sell the property to a third party. The advantage to the lender is that it does not have to deal with costly foreclosure proceedings.
For homeowners who have no opportunity to reinstate, redeem or even sell their property and just want out of the property, a deed-in-lieu of foreclosure may be viable option. Essentially, a deed-in-lieu of foreclosure is a transfer of title from a borrower to the lender, which the lender accepts as full satisfaction of the mortgage debt. With this option, you as a borrower voluntarily “give back” your property to the mortgage company. You won’t save the house, but you do avoid the trauma of foreclosure and reduce any negative impact on your credit.
7. Bankruptcy Stay
A bankruptcy case, if filed before the foreclosure sale date, will stop the foreclosure sale from taking place. Under a Chapter 13 plan, you can make regular monthly payments and be given a reasonable period of time to bring your loan payments up-to-date to save your property. Bankruptcy is sometimes referred to as a debt restructuring because it allows the debtor “owner” a chance to be released from some debts and catch up on others. It is very complicated and customized for every case. Sharon Sherman provides a free consultation and allows the debtor to pay most legal fees through a payment plan.
Attorney Sharon Sherman (817) 540-2422
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