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Mark Cappel
UpdatedAug 10, 2010
Key Takeaways:
  • Consult with a bankruptcy attorney to understand your options.
  • Explain your options and finances to your creditors.
  • Negotiate, and if one of the parties is not reasonable then file Chapter 7.

How can I negotiate with unreasonable mortgage creditors? Should I avoid foreclosure at all costs, and what happens if I don't?

I have a house I am trying to sell (11 months) and it has been going through the short sale process. The bank (Bank of America) is being difficult to work with. They have finally accepted a buyer, however the Mortgage Insurance want $25,000 to approve the short sale. We have no other debt and cannot pay this, we have asked to lower the amount, but went from $30k to $25k. We have moved to TX from MN. Our house that is being sold is in MN. How does a foreclosure affect us differently than a short sale in this situation. What is the better option?

All short sales are difficult. No mortgage servicers' negotiators are particularly reasonable, in my experience. Nor should they be because they have a fiduciary responsibility to the investors who are about to lose a great deal of money on the mortgages they thought would be sure things.

If your mortgage servicer or the PMI provider will not negotiate, then you need to do three things. First, consult with a bankruptcy attorney in your state of residence to discuss your financial situation. Learn if you qualify for Chapter 7 bankruptcy. If so, then take careful notes on how much each creditor will receive if you decide to go this route. Ask your attorney questions about the impact on your finances, credit rating, and your creditors in detail.

Second, contact the customer service representative at Bank of America and the PMI provider. Explain that you have consulted with a bankruptcy attorney, and make it clear that you have not decided to take the Chapter 7 route yet. Lay out your finances and briefly explain what the bankruptcy attorney told you so that it is clear you do understand all of your rights and potential liabilities for each course of action. Explain that each creditor's behavior will dictate your course of action. If each negotiates, then you will not file for Chapter 7. If you cannot reach a reasonable settlement, then you will have no choice but to file.

Third, start negotiating. You need to give up something as an incentive for the other party to not walk away. Do you have assets you can liquidate to come up with a lump-sum payment? Can you borrow a small amount from a relative? Avoid invading any retirement funds (IRAs or 401(k)s) because if you file for bankruptcy it is likely the bankruptcy trustee will not touch those funds either.

If all parties are reasonable and believe you when you say you are willing to file for Chapter 7, then you will have a successful negotiation. If any party is unwilling to give up something in the negotiations then they will fail and you will have no choice but to allow the foreclosure. Once the creditors pursue you for the deficiency balance, then you will file for Chapter 7 as you promised, leaving Bank of America and the PMI provider little or nothing.

I hope this information helps you Find. Learn & Save.




BBill, Aug, 2010
I am curious to learn where in Minnesota law that recourse is outlawed. My reading of Minnesota Chapter 580 does not reveal that language. Is there case law on this issue? If so, please cite the source so that I can update my information about Minnesota.
JJoe Stradcutter - MN Short Sal, Aug, 2010
If Bank of America is the only loan on this property, you may not even have to consider bankruptcy. MN is a non-recourse state meaning that if this is a foreclosure by advertisement (and most MN foreclosures are), once the property goes back to the lender, they cannot request a promissory note or pursue a deficiency judgment. You will have a foreclosure on your record, which has some long term negative effects. They may back down once they realize that they can't pursue you and they'll lose even more money if they allow the home to go through MN's lengthy foreclosure process.