Truth in Foreclosure

Selling your home is the most common way to exit foreclosure without getting approval from your lender.  If selling isn’t an option for you, you can also consider pursuing legal action against you lender or filing bankruptcy in some situations.

Both of these actions, however, require local, experienced legal counsel.  We highly recommend checking out the National Association of Consumer Advocates web site for a referral lawyer in your area.  We do not recommend going to your personal, general practice lawyer because they will not know the specifics of Truth in Lending laws, mortgage regulations, or bankruptcy.  They may be able to give you a good referral, though.

Litigation

If you believe there was anything improper about the way your loan was sold or structured or the manner in which the foreclosure action has been initiated or conducted, you should contact your lender with your concern.  If they refuse to correct the error, it may be appropriate to bring legal action against them.  You may want to consider legal action if you feel you were defrauded by the lender, its employees, or the broker that sold you your loan as well.  Finally, if you have been a victim of any of the examples in our lender abuse article, you should also contact a lawyer experienced in these areas.

Bankruptcy

Bankruptcy should be a last resort.  Once you file for bankruptcy, your opportunity to negotiate with your lender goes away.  Proactive homeowners are often successful in negotiating with lenders to reduce monthly payments, reduce interest rates, and waive certain fees.  You can also often get past due payments and charges added to the loan balance and re-amortized into the mortgage.  All these options are gone once you file bankruptcy, though.  Your mortgage cannot be modified unless it’s removed from the bankruptcy case.

On the flip side, however, a bankruptcy filing can eliminate your legal responsibility to pay for your mortgage.  What it does not do, however, is remove the lien from your home, which means your lender can still foreclose on you and kick you out of your home.

Terms to understand

• Automatic Stay – Once you file for bankruptcy, the bankruptcy court will create what’s called an automatic stay to prevent your creditors (including your mortgage lender) from taking any action to collect debts from you.  This will stop the foreclosure for the time being. There can be limitations on this stay if you’ve filed for bankruptcy within the past 12 months, but these limits can also be adjusted by the court if they judge your case as being filed in good faith.
• Discharge – A discharge of debt eliminates your legal obligation to pay for discharged debts.  All debts are not discharged in a bankruptcy, though.  Credit cards, medical bills, and back utility debts are usually discharged.  Child support, alimony, most student loans, court ordered payments, criminal fines, and most taxes are not.
• Exemptions – There are certain items (which vary from state to state) that are protected by the court, which means they cannot require you to sell these assets to pay into the bankruptcy plan.  Exemptions usually include protection for equity in your home (not the home itself), your car (one car is protected per income-producing person usually), and your household goods.  In most consumer bankruptcy cases, nearly all of the debtor’s property is exempted.
• Chapter 7 Liquidation – This discharges most unsecured debt without payment.  As discussed above, your mortgage debt is usually discharged as well.  However, this does not keep a lender from foreclosing because your mortgage is secured by a lien on your home.  If the mortgage isn’t paid, they can take your home…even if you’re no longer legally obligated to pay for the mortgage.  While your other debts are unsecured, your mortgage is secured, which is why they can still foreclose after the bankruptcy.
• Chapter 13 Repayment Plan – Allows you to repay your creditors (either in part or in whole) over time.  Repayment plans typically span from 3 to 5 years, which is longer than most forbearance or repayment plans you can negotiate with your lender.  However, homeowners very frequently cannot make these payments and wind up back in foreclosure within a year.  A Chapter 13 bankruptcy can add hundreds of dollars of required payments to your budget every month because as soon as you enter the repayment plan you have to begin paying:                                       1.  Your original mortgage payment,

  2.  Unsecured debts not part of the repayment plan,

  3.  A court-ordered repayment plan payment, and

  4.  Your normal monthly bills

• Reaffirmation agreement – An agreement made during bankruptcy in which you agree to remain legally obligated to pay some or all of a debt that could have been eliminated.  These are usually not required in a Chapter 13 cases because debts are not discharged.  If you file for a Chapter 7 bankruptcy and your mortgage is current when you file, your lender may ask for a reaffirmation agreement.

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To be eligible to file bankruptcy, you must receive credit counselling from an approved agency (find one at:  http://www.usdoj.gov/ust) within 180 days before filing for bankruptcy.  This counselling can be done on the phone, in person, or over the Internet.  Truth in Foreclosure does not offer this counselling, but if you think you might file for bankruptcy, we recommend getting the counselling out of the way as soon as possible.  To get a home mortgage discharged in Chapter 7 or Chapter 13 cases, you will also need to attend a financial management course after you file for bankruptcy. You must also pass a means test before you can file for bankruptcy.  This doesn’t affect most consumers filing for bankruptcy because if your family’s income is below the median income in your state (available at: http://www.usdoj.gov/ust), you are protected under a “safe harbor.”  If you’re above these figures, you have to fill out a form that compares your income with your expenses to find out if you qualify or not.  If you don’t qualify for a Chapter 7 filing, you can still file for a Chapter 13 if you qualify. If you’ve had debts discharged through a Chapter 7 bankruptcy within the past 8 years, you cannot file another Chapter 7 case or a Chapter 13 case for 4 years.  As an exception to this, though, if you’ve had a completed Chapter 7 case in the last 4 years and want to file a Chapter 13 case to cure a mortgage default, you can.  This Chapter 13 filing will only cover your mortgage debt only, however.  The rest of your debt cannot be included. Affects of Bankruptcy on Your Credit The bankruptcy can stay on your credit for up to 10 years.  The impact, however, is not much worse usually than if you had several defaults on other debts.  Some creditors actually target people coming out of Chapter 7 cases because they know they don’t have any debt and cannot file for bankruptcy again for another 8 years. Filing for bankruptcy will probably pose a problem if you try to get another home loan, however.  If you maintain a good payment and credit record for 2 – 4 years after your bankruptcy, though, your credit score will rebound slowly and lenders will consider you again.  Just like having a foreclosure on your credit report, you’ll need to take a slow, steady approach to building your credit back, but within 5 - 7 years, you should be back where you were before your late payments if you’re diligent. Final Thoughts 1.  The National Consumer Law Center put together this list of 13 Important Consideration About Bankruptcy that we recommend you read and consider carefully. 2.  A bankruptcy does not always stop a foreclosure…in most cases it just slows it down and if you fail in your banruptcy repayment plan, the foreclosure will pick up again right where it left off before you filed the bankruptcy motion.  And over 95% of these plans fail! 3.  You must get qualified legal advice from a bankruptcy attorney.  We recommend you get as much information as you can from a trusted source like Nolo Press and then put together a plan you think will work.  Take that plan to an attorney and see if they agree.  Spend the $150 or $200 it will cost you rather than go into court blind, not knowing what to expect. 4.  If you think there is even a remote chance you’ll file bankruptcy, get the required credit counseling as soon as possible.  Go to:  http://www.usdoj.gov/ust/ to find a counseling agency to work with. Don’t forget to sign up for our e-mail updates below so you don’t miss anything!

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