Your Options When Facing Home Foreclosure
If you have fallen behind on your mortgage payments, you may be thinking about seeking protection in bankruptcy. Once you file for bankruptcy protection, you will be entitled to the automatic stay, which prohibits most creditors (including mortgage lenders) from calling, writing or taking legal action to collect a debt from you. The reality, though, is that bankruptcy is rarely a long-term solution to your inability to pay your mortgage. Here’s why:
- While a bankruptcy discharge eliminates your personal liability on the mortgage obligation, the lien on your home or property generally “passes through” and remains after a discharge. In other words, a bankruptcy does not allow you to continue not paying a mortgage and keep the property indefinitely.
- If you have enough equity in your home, a Chapter 7 bankruptcy can result in the trustee selling it, paying off the mortgages, giving you some money, and keeping the rest to pay creditors. Under the bankruptcy laws, you are entitled to an exemption for your home, but it’s an exemption on the equity you have in your home. Your equity is the difference between the amount you owe and the fair market value of your home. If you owe nothing on your home, it’s all equity, but you will only be entitled to the exemption amount of equity. Under the federal bankruptcy exemptions, that amount is currently $22,975.00 per individual or $44950.00 for a husband and wife filing jointly. (There are different rules where only one of multiple owners files bankruptcy. If the numbers support it, the bankruptcy trustee will choose to sell your home and give you up to the amount of the exemption in your equity, before using any remaining proceeds to pay off creditors. (This is very simplified. You need to see a qualified attorney to review your situation)
- If you file bankruptcy under Chapter 13 you can use a bankruptcy plan to bring the loan current, while resuming normal monthly payments. (In New Jersey, this right ends when a Sheriff Sale takes place.) Nonetheless, Chapter 13 can be an effective tool to help prevent the loss of your home, especially if your financial challenges are temporary or tied to a specific event, such as the loss of a job, a divorce or an injury or illness. In addition, you can rid yourself of other obligations that make it difficult to make your mortgage payments. Ideally, when you come out of Chapter 13, you won’t have the overwhelming obligations you previously faced.
You Have More Time Than You Think
A common misperception is that, once your lender has sent notice of foreclosure or initiated foreclosure proceedings, you have little time before you must vacate the premises. In New Jersey, the current reality is that it typically takes eight months or more for a property to make it to a foreclosure sale. In other states the timing and procedures will be different.
For most people the best thing to do as the foreclosure process moves forward is to stay in your home. That way, the home is occupied and homeowners insurance at normal rates remains available. If you vacate the premises, your homeowner’s insurance may not cover any losses, even if you were current on the premiums. Staying in the home allows you to accumulate funds to pay for moving expenses, a security deposit on a rental, or other important purposes.
Until a Sheriff Sale or other sale of the property, some things are critical. Make sure there is insurance providing coverage to YOU in place. When lenders buy insurance after a cancellation (called “forced place” insurance) you do not have coverage. If necessary, buy proper insurance for yourself. Secondly, make sure you stay current on utilities including water bills. Finally, if there is a condo or homeowner association, you will generally want to stay current on those bills as well.
A Short Sale or Deed in Lieu of Foreclosure may make matters worse.
Ironically, those well-meaning borrowers who negotiate a short sale or deed in lieu of foreclosure may make matters worse for themselves. In these situations, the property is sold or deeded back to the lender with a balance still due on the loan. There are important tax consequences and other considerations here.* In other words, these options may be right for some people, but not for everyone.
Whatever your situation, get qualified advice.
The discussion above is very general. Each situation is different. Your choices or options will be dictated by your needs and situation. Understanding all your choices and the risks and benefits of each is essential.
Contact Neuner & Ventura, LLP
We understand the stress, anxiety and confusion that can be associated with a potential bankruptcy filing. We offer a free initial consultation to every client. We do, however, reserve the right to charge a fee to review any work done by another attorney. For an appointment, call Neuner & Ventura at (856) 596-2828 or send us an e-mail. Evening and weekend appointments are available upon request.
Representing Clients Across South Jersey
* IRS CIRCULAR 230 DISCLOSURE: Pursuant to Treasury Regulations, any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used or relied upon by you or any other person, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any tax advice addressed herein.