Protect yourself from your lender during foreclosure
Image source: Jeff Turner via Flickr Creative Commons
If you're upside down on your mortgage and are behind on payments, you have likely received a letter threatening foreclosure of your home. In this case, when the home has essentially no value, it can be smarter to let it go in a Chapter 7 bankruptcy. If you have other unsecured debt that's piled up and you can't afford including credit card and medical bills, this is a practical strategy we recommend for our clients. If you have no or even negative equity in their home and can't afford to catch up back payments, surrendering is a better strategy than trying to keep a home you truly can't afford.
Once you make this decision, it can be a relief knowing you don't have a valueless albatross hanging around your neck. But even knowing that it's a financial drain, it can be hard to give up your home and one of the things many clients look forward to after bankruptcy is rebuilding their credit and saving up a down payment to buy another home in the future. This is a great plan and one that we encourage so long as you budget your money and purchase a home that fits your finances.
One critical thing to understand is the time that must elapse between a bankruptcy discharge and when you can get a new mortgage. After your discharge is issued, you'll have to wait two years before you'll be eligible for an FHA loan and it will be four years before you can get a conventional mortgage. Check out our recent blog with tips on what to do while you're waiting out this time period.
In addition to this information, there's something else you need to know about that's emerging as a trend for many homeowners who lost their homes to foreclosure and then filed bankruptcy. This news is critical to understand because it can impact your ability to get a home even after you've let the waiting period elapse, improved your credit score and saved up a down payment.
Here's what's happening – when the real estate market crashed in 2008, many homeowners could no longer afford their homes. They got a foreclosed notice and filed bankruptcy to clear out residual debts. But then when they go to apply for a new mortgage years later, they find out that they are still on the title to their old property and it prevents them from getting a new mortgage.
The process is supposed to work like this: (1) you fall behind on payments (2) your lender sends a foreclosure notice (3) you know you can't catch up on payments (4) you surrender the property (5) you file bankruptcy. But the catch in these troublesome cases is that the lender didn't go through with the foreclosure and take over the property. The lender has no contractual duty to foreclose and so the property remains in your name even though the mortgage itself was discharged in your bankruptcy filing.
This leaves you with a property attached to your name that can be an obstacle to future home ownership and can also leave you holding the bag for accruing property taxes, homeowners' association fees and fines and any municipal fines if the property isn't kept up. You don't want this. If you are already in this situation, talk to the original lender about foreclosing on the property to encourage them to take action.
If you are now behind on your mortgage payments, upside down on your loan and have other unpaid debts amassed, filing bankruptcy is a sound strategy (depending on your specific circumstances), but it may be wise to hold off. Getting a foreclosure notice is scary and the idea that your house can be put up for auction can be stressful, but it's best to wait out the bank to encourage them to act.
You can stay in the home, save up money for a down payment on a rental and your moving expenses and then wait until the bank actually forecloses on the house and sells it at an auction. But even after the auction sale, it can be months before you receive a dispossession notice. You can keep living there up until 30 days past the notice that the house is being claimed by the auction purchaser (it's a 30 day notice to vacate the premises).
This can be a short window to find a rental property, but it's the best way to make sure that when you leave the home, you will not be responsible for upkeep, accruing taxes, HOA fees and any fines. Once you move, then you can file for bankruptcy and wipe out the mortgage balance, associated property taxes and HOA fees. Filing Chapter 7 too early can leave you responsible for thousands of dollars of home costs that can accrue after your petition that are then not eligible for discharge.
If you're behind on your mortgage and other debts, it's important to get the advice of a reputable and experienced North Carolina bankruptcy attorney to protect your financial interests now and in the future. Contact the law offices of John T Orcutt for a free consultation on your debt and how you can get a financial fresh start.