A lot of us buy our houses by borrowing money from a bank or financial institution. That’s our mortgage. Every month, we make payments including some principal amount and interests to the mortgage company that lent us the money. If, for whatever reason, we fall on hard times and are unable to make those payments, we would be considered late or delinquent in our payments. After a few months of being delinquent, the mortgage company will start the pre-foreclosure process. What if you find yourself in this situation where your house is in pre-foreclosure and a very likely foreclosure? Some think that filing for bankruptcy is the only way out. But it isn’t. You have many options.
As always, of course, consult attorneys and financial advisors. We are neither, but we hope this is a good read for you to know your potential options.
First let’s try to understand the pre- to foreclosure process a little first. The process may vary a bit state by state. This article is written with the perspective of the process in California. The following is the “non-judicial foreclosure” process which is what is most often used in California. (The other option is called “judicial foreclosure” process which basically means the lender asks the court for approval to sell your house.)
1, Foreclosure Avoidance Assessment: It all starts with the bank contacting you to try to assess your situation and find if there are options. This usually happens after you did not make a few months’ payments. It’s the “foreclosure avoidance assessment” period. If any avoidance method is worked out during this time, it means you can avoid foreclosure. The avoidance method may involve spreading what you owe (plus late fees and penalties) over a longer period of time, adding those late payments to regular payments or other way of repayment, or modifying the overall loan term so you can pay less every month. Please note though, that just because you pay less every month doesn’t mean you’re paying less over the life of the loan. If you pay less every month but the loan takes much longer to be paid off, you end up paying a lot more interest over time.
2, Notice of Default (NOD): If no plan gets worked out in the previous time period, about 30 days after the lender first contacted you, the lender will record a Notice of Default with the county. This becomes public record. In many counties, these public records can be easily searched online on the county recorders database. Otherwise, anyone can visit the county office and look up these records. Around this time, because they are now public records, these pre-foreclosure homes and addresses will appear on public sites like Zillow, Redfin, Trulia etc. This is the time when you might start receiving a lot of confusing direct mail, spams or messages from different parties like lawyers, realtors and investors. From here on, you have 90 days to remedy the situation before the next stage kicks in. You still have many options during this time to avoid foreclosure.
3, Notice of (Trustee’s) Sale: If no plan gets worked out in the previous time period, about 90 days after the Notice of Default, you will receive a Notice of Sale. This informs you that your home will be sold in an auction in 21 days’ time. Please note that during these 21 days’ time, you still have many options to remedy the situation and avoid foreclosure. In the case of online auctions, your house can be seen in public auction sites like auction.com, bid4assets.com etc.
4, Sale / Auction = Foreclosure: If no plan gets worked out during the previous time period, 21 days after you received the Notice of Sale, your property will be sold in public auctions. These auctions can take place at the county office or online. Both are public. Anyone can see your house being listed on the auction list and bid on them. A lot of things can happen in these auctions. Your house may be sold for less than what you owe the lender, in which case you will likely still be responsible for difference.
5, Eviction: The eviction process will start whereby the new homeowner will evict you out of the house. This will be a very tough time for you as you may not be able to control when and where you need to go afterwards. A foreclosure stays on your credit report for a few years so your choices become limited. However, California does have protection in place to delay the eviction process. For details, please take a look at http://www.courts.ca.gov/selfhelp-eviction.htm.
Here’s a summary of the timeline:
If at all possible, please do not allow your house to go into foreclosure. A pre-foreclosure (starting at the time when you receive the Notice of Default) may stay on your credit report 2-3 years if you remedy the situation. But an actual foreclosure will stay on your credit report for 7 years. Without good credit, many things in life become difficult.
Some say that in order to stop a foreclosure, you can file a bankruptcy. But this is not something to do lightly. A bankruptcy can stay on your credit report for 10 years. Without good credit, many things in life become difficult. You get to keep the house in the meantime. AND, you do NOT get to erase your mortgage debts just because you file bankruptcy!
Why, you ask? There are 2 types of bankruptcies that an individual can file (chapter 11 is not one of them, it’s for companies only). Let’s take a look at each and see why:
Chapter 7 Bankruptcy: First of all, not everyone qualifies to file chapter 7. You have to have little or no income to qualify to file for this. If you have a steady income, chances are you don’t even qualified. EVEN if you do qualify to file chapter 7, it can ONLY help you wipe out what’s called “unsecured debt”, i.e. debts that are not secured by anything real. E.g. credit cards, medical bills. A mortgage doesn’t count. A mortgage is secured debt. Chapter 7 bankruptcy will not protect you and help you wipe out your mortgage debt.
Chapter 13 Bankruptcy: If you have any income at all, chances are the only form of bankruptcy you can file for is this one, chapter 13. This is sometimes also called the “wage earner’s plan” for this reason. The benefit here is that you get to keep your house. But the implication is that you still need to repay everything you owe. Whatever you didn’t pay yet, a repayment plan of 3-5 years will be created with interest rate set by the court, usually at prime rate plus some points. And your mortgage? You still need to pay it, whether it’s included in the new repayment plan or separately.
Below is a link to an article about the detailed differences between these 2 types of bankruptcies if you’re are so inclined to read. But suffice it to say that if you do find yourself in home pre-foreclosure, bankruptcy should really not be considered until you run out of other options: https://www.nolo.com/legal-encyclopedia/what-is-the-difference-between-chapter-7-chapter-13-bankruptcy.html.
Considering bankruptcy as the last resort and foreclosure as also a close-to-last resort, you might wonder what the other less severe options are?
As we mentioned above, during the 4-5 months in pre-foreclosure, you still have quite a few options available to you that are good remedies. If you maintain good payments afterwards, a pre-foreclosure will only stay on your credit report for 2-3 years, much less than the 7 years from an actual foreclosure and the 10 years from filing a bankruptcy.
1, Get Some Part of Your Loan Forgiven: There are many different types of loan re-modification where the terms of your loan are permanently changed. One form of this is when the lender agrees to forgive a part of the loan that you’re past due on. No, they will not forgive all of it. But getting some relief is possible and subject to negotiation with your lender. Just remember that while the Forgiveness Debt Relief Act of 2007 allows the part of the debt forgiven to be excluded from income when calculating federal taxes you may owe, it must still be reported on your federal tax returns.
2, Modify Your Loan or Get Some New Loans: Loan re-modification, or called mortgage re-structuring or re-financing, can also be done by many other formats. It may be in the form of lowering the interest rate on your loan, or lowering your monthly payment but lengthening the loan term (though in this case, you pay much more interest over the long term than your original loan), or stopping loan payments temporarily until you can make them again (called “forbearance”, which usually lasts from 3-6 months.)
3, Sell Your House (with Some Cash in Your Pocket): Here again, you have different options. Some opt for a “short sale” when the lender agrees to sell the house for less than what the loan amount is. Better yet, if possible of course, is to sell your house for over what you owe the bank in past payments plus late fees plus penalties (and don’t forget owed taxes). You can still get some cash in your pocket and move somewhere else where the cost of living is lower and where you can afford to buy a smaller house or condo with the cash you have. This is important because once you enter into pre-foreclosure when you receive the Notice of Default mentioned above, your credit is already harmed so getting a new loan with good terms will be difficult.
If you want to get an offer on your house within the next 24 hours, please call or text us at 650-777-7312, or submit a request at http://www.journeyhomellc.com/sell-a-home-with-foreclosure-tax-liens-probates-california.