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Foreclosure

By Mark Cappel Apr 18, 2013
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HIGHLIGHTS
  • Understand the causes of foreclosure.
  • Review the differences between judicial foreclosure and nonjudicial foreclosure.
  • Examine some ways to stop a foreclosure.

The Causes and Effects of Foreclosure

Foreclosures are happening at record rates in America. Unfortunately, many homeowners have already experienced a foreclosure and many others face the grim reality that they can lose their home. Understandably, this is a stressful and disheartening experience.

Foreclosure is the last rung on the ladder. It is not a good thing for you or for your lender. Foreclosure is a complicated process that involves many legal and tax issues. It is important for you to understand the types of foreclosure, how the process works, and how it can affect you.

Causes of Foreclosure

The threat of foreclosure occurs when an inability to make the mortgage payment combines with a drop in property values. Many homeowners have been placed under financial stress due to mortgage loans that adjusted to a higher interest rate or a higher monthly payment. When the interest rate or the payment rose, many borrowers found their mortgage payments were no longer affordable. Other homeowners experienced a loss of income, making it impossible to pay the monthly mortgage payment.

A home mortgage foreclosure is the legal process through which your mortgage lender moves to take your home away from you and selling it to satisfy your unpaid mortgage. Foreclosure is almost always the result of a default on monthly payments.

Foreclosure Process

Your mortgage contract should state exactly how many payments you can miss before a Notice of Default is filed against you and the foreclosure can proceed. As a general guideline, it may take 90-150 days, but could be less in some states. It is important for you to keep in mind your lender very likely will not accept a partial payment on any of your mortgage monthly payments. Unlike a credit card, you cannot mail in a portion of your payment and remain in good standing. Mortgage payments are all or nothing. This also means that if you miss one payment, the next month you have to pay the current month and all arrears to catch up!

At the time foreclosure procedures begin, your lender will file a Notice of Default against you. This notice is recorded at the county recorder’s office in the county where your home is located. You will receive a copy of the notice, usually by Certified Mail. Read the notice carefully. Consider speaking with an experienced attorney if you receive a Notice of Default. It may specify a timeframe in which you are required to respond, if you wish to head off the foreclosure, or other details that a professional will help you understand.

There are two types of foreclosure: judicial and non-judicial foreclosure.

Judicial Foreclosure

Some states require a judicial foreclosure. A judicial foreclosure is a court-ordered, public legal process, the rules of which are set forth in state law. Judicial foreclosure laws vary from state to state. The foreclosure moves, sometimes very slowly, through the civil court system, similar to a lawsuit. Some jurisdictions are swamped with foreclosures, which increases the time it takes your lender to finalize a foreclosure against you. In states using a judicial foreclosure process, your lender does not have a forced power of sale clause, which means that lender must use the state's court system to foreclose.

Non-Judicial Foreclosure

A non-judicial foreclosure happens outside of court, using a procedure specified both by state law and your loan contract. If your loan terms specify that a foreclosure can take place without the need to go through the court system, then your lender can start the foreclosure process in 60-90 days. In that case, you have a fixed period of time, which varies state-by-state, to either sell the home or to negotiate another solution.

In both judicial foreclosure states and non-judicial foreclosure states, if you do not come to an acceptable accommodation with your lender, your lender then can initiate eviction proceedings, kick you out of your home, and auction it to the highest bidder.

You may find it difficult to work things out with your lender, once the situation has reached the level of foreclosure proceedings. Still, it can be possible. If someone can help you financially or if you have a valuable asset to sell, you can stop the foreclosure by paying back all arrears on your mortgage and any foreclosure fees, or required tax or insurance payments.

Quick Tip: Each state legislature created unique foreclosure and anti-deficiency laws. Follow the links just mentioned to learn the foreclosure rules relevant to you.

Stopping Foreclosure

Forfeiting your home can be very hard emotionally. It also requires you to move and change your day-to-day life. You may want to do whatever you can to stay in your home for as long as possible. If there is no feasible way to stop foreclosure proceedings by catching up on your arrears, it makes sense for you to consider filing for bankruptcy.

A chapter 7 bankruptcy, which discharges certain debt obligations, will put the foreclosure on hold. Because a chapter 7 procedure usually only lasts a number of months, it is only a temporary fix. A chapter 13 bankruptcy, which re-organizes your debts, working out repayment terms between you and your creditors may be a more effective solution. Chapter 13 proceedings have payment plans that last as long as 5 years. Once you are under the supervision of the bankruptcy court, your lender needs permission from the court in order to move the foreclosure forward. The level of protection that bankruptcy provides can vary from state to state. Consult with an experienced bankruptcy attorney to learn more about this option.

After a foreclosure takes place, it is possible that you may be left with another problem. If your home sells for less than you owe, you may be financially responsible for the deficiency balance, which is the difference between what you owe and what the lender received in the sale of the home. Learn more about deficiency balances in the next article in this section.

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Comments (96)


Bruce A.
Winter Haven, FL  |  April 18, 2013
We filed BK chapter 7 in March of 2011. We elected not to include the house and car. Now we are still in financial trouble and are thinking of walking away. The car was reaffirmed shortly after the bk, However the house never was, and still shows on credit reports as part of the BK. Can we still walk and what are the problems going to be? Any suggestions?
Bills.com
April 18, 2013
Under the US bankruptcy code, a debtor must include a list of all creditors and the amounts and nature of their claims in their schedules. I do not understand how it would have been possible for you to not include your home or auto loans in your bankruptcy filing. It is common for auto lenders to ask debtors to reaffirm their auto loans, as you hinted at in your comment. Under the bankruptcy code, a reaffirmation agreement is valid only when the debtor's lawyer also agrees to and signs the reaffirmation.

I will assume you filed a complete list of your debts and obligations in your bankruptcy petition. You do not mention this, but I will assume your chapter 7 was discharged sometime in 2011 or early 2012, and that your personal liability for the home loan was part of the discharge. Your comment about your home loan's status on your credit reports seems to indicate your personal liability was discharged. If my string of assumptions is correct, then you can walk away from the home, in other words, allow a strategic default, and the lender will have no recourse against you.

Consult with your bankruptcy lawyer to learn if my assumptions are correct. He or she should have explained the mortgage liability issue with you while you were filing out the bankruptcy schedules.

You may not want to default and allow a foreclosure if you have plans to qualify for a home loan in the foreseeable future. That is because mortgage lenders look more favorably on short sales and deeds-in-lieu-of-foreclosure than they do foreclosures.
Karen M.
Maryland Heights, MO  |  April 17, 2013
My husband and I went through some bad times and few years ago. Filed a chapter 13, sent my payment into my Mortgage Company on time. However I mailed in the payment amount that was on the recording. Mortgage company received the payment ($72.00 short) Listed my payment as unallocated cash and relinquished themselves from the Chapter 13 (told me I should not listen to the recording) it wasn't updated in January. I have never received a form from my Mortgage company (my tax accountant says it is mandatory) stating what I owed and what they sold the house for. I believe they sold it for more than I owed. Wouldn't I get a form stating the loss I took to send in with my taxes? I have tried contacting the Bank many times, and have not received anything, nor has the IRS.
Bills.com
April 17, 2013
I confess I do not understand the chain of events you described, and in particular what happened with your chapter 13. It appears you were in the middle of chapter 13 when an accounting error resulted in a foreclosure, though that's just a guess. Accordingly, it would be improper for me to offer any thoughts. Consult with your bankruptcy lawyer and ask him or her to describe exactly what happened here, and what rights you may have to file an action (a lawsuit) against the lender/mortgage servicer.

Also ask your lawyer about your state's laws regarding what information a lender must disclose to a former homeowner/borrower following a foreclosure. Some states have no laws I can find on this matter, and others do.
Paul C.
Haines City, FL  |  February 10, 2013
Hi We live in the UK and bought a second home in Florida in 2006. Original price $320K. The house is now worth approx $200k and we owe $203k. The house costs us approx $1600 NET to maintain every month. We can no longer afford to make payments due to circumstances here in the UK and need the most cost effective exit strategy. We are not bother about out US credit ratings / etc as we no longer plan to purchase in the USA. However we do own a property in the UK and are concerned about keeping our primary residence over out heads. I look forward to reading your response.
Bills.com
February 12, 2013
Talk to the mortgage servicer — the company you send payments to — about your financial situation, and ask about a deed in lieu of foreclosure or a short sale. These are your two most graceful alternatives to allowing a strategic default.

The key issue for anyone facing a deed in lieu of foreclosure, short sale, or foreclosure is what happens to the deficiency balance. In an ideal situation from the borrower's perspective, the borrower negotiates a zero balance or forgiveness of the deficiency balance. Here, you are at a significant advantage because you reside outside of the US. It is possible legally, though impractical financially, for the lender to pursue you in the UK for a $3,000 debt. Therefore, it is likely the mortgage servicer will huff and puff and threaten to domesticate the deficiency balance in the UK, but the fact of the matter is doing so doesn't make sense.
Shirleen F.
Hillsboro, OR  |  December 16, 2012
The home I used to own with my mom and lived in for 20 years with her is about be forclosed upon as it was on a reverse mortgage under mom's name. The new mortgage company (BOA sold it to them over the past year) is offering a Deed-in-lieu of foreclosure proceedings, or a 95% of current market value, or just plain foreclosure. I know that this place is under loan value by around 100K and that it was under remodel/repair from black mold upon my mother's death. I am still living in the home and have been advised to speak with the mortgage company by the 21st as asked for in there letter stating forclosure process will begin on the 21st of Dec. How long will the forclosure take? I have been told that I could not purchase the home myself at the 95% rate as that is not legal? I would like to negotiate (sp) with them as I have found out that if I can get a job and stay on it for 6 months I would qualify for a housing loan and if there were some legal way to buy this home I could. I am thinking that I can not get 'key money' as the home is in disrepair due to the completely gutted bathroom. Heck I don't understand any of this but I have to call them within 5 days. Any info or advice would be appreciated.
Bills.com
December 21, 2012
My first and last word here will be for you to consult with a lawyer who has real property, probate, or contracts experience.

If the reverse mortgage is an FHA Home Equity Conversion Mortgage (HECM), then FHA regulations at 24 CFR 206.125(c) apply when the reverse mortgage borrower dies. 24 CFR 206.125(c) gives an heir the option to satisfy the HECM debt by paying the lesser of the mortgage balance or 95% of the current appraised value of the property. I do not understand why the lender would tell you the rule at 24 CFR 206.125(c) does not apply unless the reverse mortgage here is not an FHA HECM. Non-FHA reverse mortgages are rare, but not unheard of.

You asked about the timing of a foreclosure, and indicated you reside in Oregon. The customary time for a foreclosure in Oregon is about 6 months. See the Bills.com resource Foreclosure Laws For All US States to learn more about your state.

You mentioned qualifying for a mortgage. See the Bills.com mortgage affordability and payment calculators to learn if it is even in the realm of financial possibility to afford the house. Also, read what you need to qualify for a mortgage.

As I mentioned at the start, consult with a lawyer immediately.
Ann C.
August 26, 2012
We filed bankruptcy 3 years ago. The house was in it. Now we want to move. Can I just sign house over to bank? They said I have to try a short sale. Will I be responsible for deficit -- the deficiency balance?
Bills.com
August 27, 2012
I assume you qualified for a chapter 7 bankruptcy. If so, then you have no legal obligation to pay the debt. This is because the chapter 7 bankruptcy removed your personal liability for the home loan. If you stop making your monthly home loan payments, the bank can foreclose on the property, but has not legal claim to collect the deficiency balance from you.

Consult with your bankruptcy attorney to understand which, if any, financial obligations may exist following your bankruptcy discharge, and to learn more about your liability for the home loan. Notice that I made a big assumption at the start of my reply here, and you may be facing different circumstances if your bankruptcy was a chapter 13.
Nora V.
Merced, CA  |  August 09, 2012
Hi. My spouse and I bought a home Aug 2006. It was a negative amortization ARM. We put $30000 down, and by 2009 we couldn't make the payment. In Dec. 2009 we filed for ch7. By march 2010 it was finalized. We did not include our home in the filing, because we did a modification, Sadly, by Dec. 2009 I lost my 2 jobs,and lived of my husband's income, with 3 kids. So, we stopped paying. Now, as of Aug. 2012 our home is foreclosed and up for sale. We bought it for 410,000.00 and its going for 150,000.00. My question is, my family feels we should take every upgrade we put in the home, like the dishwasher, nice french doors, 4 thousand cabinets, and our high end fixtures. I am scared to basically "strip" the home, because I'm afraid i will go to jail, but I feel in a way I have the right to take all these items, since i bought them. My question is, I live in California and what are the laws for taken items from the home that has been foreclosed on? Will we have to pay back? Face jail time?? Also how long will it be before we can buy another home,the loan we had was a conventional loan, but I'm hearing I can get a FHA in 3 yrs, i thought it was 10 yrs?? Will I owe taxes on this home? Once your home is foreclosed on, how many days do you have to leave the property? Or, if it sells, how many days do they give you to leave? I'm so sorry for all these questions. I'm basically breaking down and need answers.Thanks!
Bills.com
August 13, 2012
I do not understand how a debtor can not include a mortgage in a bankruptcy filing because under US bankruptcy code, a debtor must include a list of all creditors and the amounts and nature of their claims in their schedules. But that is aside from the point of your question, and I will assume your mortgage was somehow exempted from this rule.

You are free to remove anything from your home, including its appliances, fixtures, and cabinetry. It is not a crime to sell a home without its interior doors, or light fixtures, or other items we expect to see in a home.

Regarding eligibility for an FHA loan, the seasoning time that must pass after a foreclosure is 36 months, and 24 months from a bankruptcy.

Regarding foreclosure and taxes, see the Bills.com resource Mortgage Forgiveness Debt Relief Act if the lender forgives the deficiency balance. You mentioned California. See the Bills.com resource California Anti-Deficiency to learn more about laws that might make it impossible for the lender to pursue you for any deficiency balance.
Ann C.
August 06, 2012
I filled for bankruptcy three years ago, and the mortgage was included. We stayed in the house and made mortgage payments. We are currently almost 3 months behind on the payments, and want to leave because the payments are too high. Can we get out of the mortgage without affecting my credit score?
Bills.com
August 06, 2012
I assume your bankruptcy was a chapter 7. If so, the discharge removed your personal liability for the home loan. If you look carefully at your three credit reports from Equifax, Experian, and TransUnion, you will almost certainly notice reporting on the bankruptcy ceased at the date of your discharge. That is because you no longer have personal liability for the loan.

The bankruptcy had a negative impact on your credit score. A foreclosure will appear on the public record section of your credit reports, and will have a negative impact on your credit score. See the Bills.com article Bankruptcy, Foreclosure & Your Credit Score to learn more.
Crystal S.
Centennial, CO  |  February 02, 2012
My husband and I had our chapter 7 discharged 4 years ago this May. We did not reaffirm our mortgage, but have been making payments on-time since that time. We only today discovered that this has not been helping our credit score at all. Right now we are frustrated that we have been "renters" without knowing but need to figure out how to proceed forward. We want to just walk away and let the house foreclose, but if we do that will we have to wait another 3 years to get an FHA loan? Wish we would have known this 4 years ago as we would have never stayed in the home. Please help!
Bills.com
February 04, 2012
Bankruptcy lawyers should do a better job in explaining the credit score impact of a chapter 7. However, in most situations, the immediate concern is filing quickly, accurately, and efficiently, and the secondary credit score after-effects are not important.

As implied in your comment, a successful chapter 7 removes the borrower's personal liability for the loan, which causes the home loan to be no longer reported to the credit reporting agencies. See How Is Bankruptcy Shown on a Credit Report? to learn more.

The FHA requires two years of "seasoning" after a chapter 7 discharge to qualify for a new home loan, and three years of seasoning following a foreclosure. Please see the Bills.com resource FHA Loan Requirements and Underwriting Standards to learn more.
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Gloria T.
Bellerose, NY  |  February 05, 2012
We are experiencing the same situation as you are. Luckily, ours has only been 13 months of paying rent. We contacted a Mortgage Broker. Our first mortgage was an FHA loan. He said that in order to qualify for another loan we would have to wait 3+ years after the "Sale" date of the property. If the sale price was less than what was owed on the home then we would have to pay FHA the difference. We are currently looking for an Owner Financing option as renting another place is not really an option. From what I have been reading online a lot of people have been doing what is called 'stay and pay' after their mortgage has been discharged, or counted the same as surrendering the house. We will be calling around Monday to find out more about this situation, because like you we are wondering does this mean that since we didn't surrender the property right after the bankruptcy that we will then have to wait for the house to sell and then 3+ years from that date we can start looking into another loan? I hope this helps you with your original question, as I found the reply from Bills to be a bit vague.
Chris H.
Louisville, KY  |  January 19, 2012
I have a mortgage with BofA and have let them know tha we are having trouble making our payment. We have never been late on a pmt on any mtg but were late two of the last 3 months. I tried to do a making home affordable program with them but they seem to feel that since I am now curreent that I am OK. I am telling them we need help but they do not want to. We love our home but feel it is easier to throw them the keys and walk away! Rent a home for much less and payoff CC debt and actually go on vacations! We are honest people but feel at this point, take our home back, it would be a weight off our shoulders. My wife is self employed but her income is different month to month. Is there a problem or way to turn our home back to them without financial reprocussions?? Please advise what you think we can do. We are at our wits end. Thx. Chris
Bills.com
January 20, 2012
The best way to free yourself of a property without financial repercussions is to sell it. If you are upside-down, then consider a deed-in-lieu-of-foreclosure or a short sale. Otherwise, what you are describing is called a strategic default.

If you are upside-down and want to stay in the property, consider the HARP 2.0 program.
Christine L.
T/o Webster, NY  |  November 10, 2011
I went through an ugly divorce and my ex was to take over the house after I was required to leave. He left the house and stopped paying the mortgage which my name was on. The house just went into foreclosure which was 2 1/2 years after he stopped paying. I ended up filing bankruptcy earlier this year to get out from under the debt. I'm with someone now and I am trying to purchase a house. Is there a way for both of us to qualify. He has good credit, but currently has a house that will be up for sale next year. We have talked to a mortgage person and we were told that we could not have me on a mortgage. What other options do I have or can I be on a mortgage?
Bills.com
November 11, 2011
Generally, the best loan for people with bad credit is a FHA mortgage. They require a low credit score, currently 580, for those with credit. The FHA will offer loans, assuming you maintain perfect credit for two years after the discharge for a bankruptcy and three years after the final date of disclosure for a foreclosure.

Since you do not qualify under these terms you will not find a mortgage available in today's market. An exception to this might be a hard-money lender, who may offer a loan, but at high rates.

Work on maintaining perfect credit and building up your credit score. Alternatively, if the other party you mentioned can qualify alone for new loan, follow that tactic.
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