Stop Foreclosure: Bankruptcy Alternatives

Home Foreclosure can be avoided through Bankruptcy:

In the midst of the nation’s largest ever foreclosure crises, San Diego homeowners are on the brink of being homeless. The following is a brief summary of means by which a homeowner can take control of their situation through a Bankruptcy filing.

The Foreclosure Process and Timeline:

In California, after a homeowner becomes three months delinquent, the Lender is able to file a Notice of Default against the title to the Property. This is where the foreclosure process begins, and things accelerate quickly from this point. Three months later, the Lender is authorized under California State Law to Post a Notice of Sale and schedule a date and time 25 calendar days later for the auction or sale of the property. Once the Notice of Sale is posted and the Sale Date is Scheduled, filing for Federal Bankruptcy Protection is the only way to stop the sale of the Property.
Day 1
Notice of Default is filed with the county recorder.
Within 10 business days
Mail Notice of Default to borrower address
Within 1 month
Mail Notice of Default
After 3 months
Set Trustee Sale date
25 days before Trustee Sale date
Send notice of sale to I.R.S. (as applicable)
Within 10 days from 1st publication of Trustee Sale
Send beneficiary request for property directions
14 days before Trustee Sale date
Record Notice of Trustee Sale
7 days before sale date
If court action, 7day rule may apply
5 business days before sale date
Expiration of borrower’s right to re-instate the loan
Sale date
Property is sold to highest third party bidder or reverts to Beneficiary at public auction

CHAPTER 13 Bankruptcy:

The most popular cure for mortgage default is through the process of Chapter 13 Bankruptcy. In a Chapter 13, the Debtor submits a Plan to the Trustee (known as the “Chapter 13 Plan”). Under “the plan” the delinquency can be remedied over a 36 to 60 month period. Filing for Chapter 13 Bankruptcy places an Automatic Stay against any foreclosure action by the Lien Holder.
Chapter 13 demands that the Debtor demonstrate sufficient income to support the Plan. Assuming the Debtor is able to make the Plan payments and keep current the Debtor will avoid foreclosure and keep the home.

In situations where there are 2nd and 3rd liens against the property, filing for Chapter 13 may also help the Debtor eliminate the payments to the 2nd and 3rd mortgages. Particularly now as home values have fallen so drastically, the Bankruptcy code regards these liens as unsecured. This allows the Chapter 13 Court to “lien strip” the 2nd and 3rd mortgages rendering them unsecured and in the eyes of the court makes them a non priority debt that the Debtor may never have to repay.

Chapter 7 Bankruptcy:

The Fresh Start. In more and more cases, the Debtor is unable to make any payments to anyone and therefore needs to seek protection under Chapter 7 of the Bankruptcy Code. As in Chapter 13 Bankruptcy, filing for Chapter 7 Bankruptcy will place an automatic stay on the sale of the home and the Debtor will be able to stay in the home while the case is pending and sometimes even longer. This can often give the Debtor time to seek new employment, gather savings to procure a new place to live, or even build a repayment plan with the Lender, etc. None of us want to end up as a panhandler on a freeway off ramp.
Chapter 7 will further cancel all the debt that is secured by the Property including any 2nd liens or Home Equity Lines of Credit. Thus the Debtor will be able to avoid any future deficiency judgments that will arise from the forced sale of the Property.

It is important to understand the distinction, Chapter 13 is about saving the home, and Chapter 7 is about saving you. Chapter 7 will not forever prevent the foreclosure sale. Although the debt is cancelled as to the Debtor, it remains a lien on the Property. Chapter 7 allows you to leave the home on your own terms and generally on your own time. The alternative is to endure the very public eviction process where the Sherriff will be retained to remove you and all of your belongings from the house.

A Deficiency Judgment is levied when the Lender forecloses on the Property, sells it at auction and does not attain a sale price equal to or greater than the loan they made to the Debtor. Under the terms of the mortgage documents, the Lender will be allowed to pursue the Homeowner for the deficiency. The defense of such an action can be very time consuming and very expensive.

Loan Modifications:

We see more and more people who hired Loan Modification Companies to procure a “Loan Modification” on their behalf under the promises made by the Obama Administration’s “Hope for Homeowner’s” or “Home Affordability Modification Program”. Consumer and government dissatisfaction is at an unprecedented high level with regard to lackluster non responsiveness from the major lending institutions, and the ineptitude of the newly hired “Negotiators” and “Underwriters”. As well, many of these modification companies instructed homeowners to voluntarily fall behind on their mortgages.

This has resulted in the accumulation of late fees, legal fees, penalties and so forth which now makes it impossible for the Home Owner to reinstate the loan on their own and avoid foreclosure.
The Banks are insured for the losses. The mess that is the quagmire of servicing companies and Investors who own the loans has made it virtually impossible to determine who will incur what loss. As well, the Bank’s are required to perform a “Net Present Value” test prior to granting a modification. Under this test, if the first lien holder will endure less loss through foreclosure than through a modification, they are free and obligated by their investors to pursue the foreclosure and not grant the modification.

So, in a typical scenario we can look at a house that has $300,000.00 owed on it. The Net Present Value of the home is $250,000.00. The first lien holder is secured up to $230,000.00 and the 2nd lien holder to $70,000.00. The first lien holder will not provide a modification as they can be made whole through a foreclosure. The second lien holder has no say, and if the first lien holder forecloses, the second lien holder will then have a right of action against the homeowner for a deficiency.

Bankruptcy’s Effect on Your Credit Score:

It should be no secret that both bankruptcy and foreclosure will have a negative impact on your credit score. However, more often than not bankruptcy is the preferable option when trying to rebuild credit. Here’s the simple math:

A foreclosure will damage your credit score for many years, will not get rid of your other debt, and is particularly harmful if you are house shopping. Thus you have taken the Credit hit and are still in debt. As well, a foreclosure, like bankruptcy is a public record.

In contrast, discharging your debts in bankruptcy will harm your credit score, but can help you rebuild your score quicker than after a foreclosure. This is because bankruptcy will leave you solvent and debt-free and therefore able to start rebuilding good credit sooner. Your debt to income ratio will quickly fall through the floor and this has an inherent positive effect.
Keep in mind that the current mortgage meltdown and credit crunch (which are prevalent at the time this article is being written) may change the way bankruptcy and foreclosure affect credit ratings.

The above is a summary survival guide for those facing foreclosure. It is not intended to be legal advice. Every situation is different, and every person facing foreclosure needs to consult an attorney.
If you are facing foreclosure, or know someone who is but who is too afraid to face up to reality, call our office to schedule an appointment. We are here to fix the problem.