One of the biggest fears many people have when facing financial difficulties is the risk of losing a home. If a homeowner does not pay their mortgage payments, the lender can repossess the house and sell it to recover the remaining amount of the mortgage. This is called foreclosure.
In order to foreclose on a house, the lender must record a Notice of Default with the county recorder to officially state that the homeowner is in default (unable to repay their debt). The recorder will send an official Notice of Default to the homeowner and they have 90 days to cure the default by bringing their mortgage payments current. If the homeowner doesn’t cure the default within the 90 days, the lender notices the home for sale no earlier than 4 weeks from the end of the 90 days. Upon final foreclosure sell, the homeowner must move.
The good news is that there are things the homeowner can do to prevent foreclosure or to stop the foreclosure process before the house is sold.
One option is bankruptcy. If the homeowner files for bankruptcy before the house is sold, the court issues an “automatic stay,” which stops all collection attempts, including foreclosure. Under a chapter 13 bankruptcy, the owner can pay off past missed payments over a period of time while continuing to make ongoing monthly payments. Filing a chapter 7 bankruptcy does not remove the mortgage, but it does give the homeowner more time to explore their options. In either case, the foreclosure cannot proceed without permission from the bankruptcy court.
It is also sometimes possible to work out an agreement with the lender to prevent foreclosure. Depending on the homeowner’s situation, the lender may agree to add the missed payments on to the end of the loan or give the homeowner a chance to catch up on their payments before the lender pursues foreclosure. However, it is the lender’s decision whether or not to offer these modifications, and not all lenders will be willing to do so.
Another option is if the homeowner and lender agree on a short sale. In a short sale, the homeowner sells the home to pay off most of the mortgage and the lender agrees to forgive the difference between the full mortgage amount and what the owner received in the sale. However, the owner may be required to pay taxes on the forgiven amount because the IRS may consider this as taxable income.
The decision of how to handle an impending foreclosure is a difficult decision and should not be made alone. Bankruptcy lawyers are knowledgeable in the details of the bankruptcy and foreclosure laws and can give homeowners advice on the best course of action for their specific situation.