FORECLOSURE

Back in the rich days of ever appreciating real estate, people fought to save their homes. They often used Chapter 13 to play catch-up on a mortgage loan in arrears and avoid foreclosure. Now, many people find themselves upside down on their mortgages (owe much more on their house than it is worth). At least for the time being, this problem will continue to get worse. People often have mortgages where the low teaser rates are disappearing and the monthly regular payment is simply out of reach. They find themselves borrowing money from credit cards to pay on a mortgage that they can’t afford. With property values that continue to plummet, their situation just keeps getting worse and worse with no end in sight. They just dig themselves deeper and deeper. STOP THE INSANITY!

If you are in that situation, a Chapter 7 bankruptcy may just let you draw a line in the sand and start fresh. Many people think a “short-sale” will benefit them over simply filing a bankruptcy and then permitting a house to go to foreclosure. While theoretically some people will be benefited by a short-sale, most distressed debtors are actually better off letting that foreclosure happen. This is because, when you do a short-sale, you no longer own the property and must pay rent to your new landlord or immediately vacate your residence. In a foreclosure situation, you can at least occupy your residence until the property is no longer yours (until the trustee’s sale). After the trustee’s sale, you no longer own the property and the owner (presumably the bank), can evict you. However, this can sometimes be many months away.

The thing is, if you have already defaulted on a mortgage, and have been late paying on your credit cards, your FICO score has already dropped precipitously. The fact of a subsequent foreclosure (or bankruptcy) cannot make it much worse. Also, I have seen many instances where a person still has liability on the various mortgage loans despite the foreclosure. This often happens with refinanced loans where there are completely unsecured second mortgages or home equity lines of credit. The foreclosing lender generally cannot sue, but the other lenders (the non-purchase money lenders) can still sue to enforce the loan amount. With a bankruptcy, those lenders cannot enforce their debt. Good-bye debt.

In 3 or 4 years, the fact that you had extreme credit distress that led to a bankruptcy and foreclosure will be more of a distant memory. If you are a person with significant cash-flow, you will be able to save money. Most people are better off paying cash or simply doing without. Credit is what has sucked the life-blood out of so many people anyway. However, I digress. It is important for many people to rebuild their credit score so they can get new lines in the future, perhaps buy another home or a car. If you have been able to save money, and have established some lines of credit that you use wisely (pay off every month!), then your credit score will start to rise. Ask yourself, who is a better credit risk: 1) the person struggling to survive who has large debt obligations that he can’t really afford and who may default at any minute, or 2) the post-bankruptcy person who has no exposure to old debt obligations, and has used credit after the bankruptcy in such a way that demonstrates really good cash flow (charge up and pay down, don’t maintain balances on credit cards!)?

DO NOT LET A FORECLOSURE OR SHORT-SALE HAPPEN BEFORE YOU CONSULT A BANKRUPTCY ATTORNEY. First, there may be tax consequences of a foreclosure or short-sell for cancellation of indebtedness or because of capital gains (you might even be referred to a CPA). Second, if you are a high-income debtor, you may only qualify and get your chance for a straight Chapter 7 bankruptcy while you have secured debt. Secured debt and the obligation thereon helps an otherwise high-income earner qualify for a Chapter 7. Once a foreclosure happens, no more secured debt on the house. You need to talk to a bankruptcy attorney to see how the numbers work out for you.

Having said all of that, if you are just in the classic situation of old (the mid 2000s!) where you can afford your mortgage on a going forward basis and you just need to get some breathing room to catch-up or sale your property to cash-in on the equity, then a Chapter 13 will likely be the appropriate choice. WHATEVER YOUR STRATEGY, ONCE THE TRUSTEE’S SALE HAPPENS IN THE FORECLOSURE PROCESS (usually about 120 days after the date the Notice of Default was recorded), YOU NO LONGER OWN AN INTEREST IN THE PROPERTY. IT IS ALMOST ALWAYS TOO LATE AT THAT POINT TO DO ANYTHING ABOUT IT. YOU MUST HAVE A BANKRUPTCY ON FILE BEFORE THE TRUSTEE’S SALE DATE OR YOUR PROPERTY WILL BE LOST.

Call Attorney Marty K. Courson at 415-433-3100 to schedule a free bankruptcy consultation and stop that foreclosure before it is too late.