Bankruptcy Blog

Options Other Than Foreclosure

If you are facing a foreclosure, there are several options available to you:

• Sell your home.  Depending on how much equity you have, you may be able to sell your home and prevent the foreclosure.  If you sell your home prior to the mortgage company foreclosing you can keep any profit that you make.

• File bankruptcy and sell your home though the bankruptcy court.  Many people don’t know that you can use the automatic stay to protect your home – and your exempt equity – by letting the bankruptcy trustee sell your home.  Generally, this works only if there is enough non-exempt equity in your home to make it worth while for the trustee to take the time and expend the money necessary to sell it.  Note also that the mortgage loan is discharged under the Chapter 7 and there are no tax consequences as a result (debt discharge income – see below).

• Short sale:  A short sale is where you sell your home for less than what is owed on the mortgage.  BE CAREFUL about fraudulent short sales!  You are not permitted to get any money from the sale of the home. If you do get money for things such as furniture or other items that are purchased by the Buyer, make sure you get a bill of sale – and that you really sell the furniture.  To do otherwise is a violation of RESPA – no matter what your real estate agent tells you.

• Deed in Lieu:  First a word of caution.  Debts that are discharged in bankruptcy are not income.  But debts that are discharged a result of a creditor forgiving that debt can cause you to incur taxes for  “debt discharge income” and the lender can report the forgiven amount to the IRS.  As a result, if you transfer you property to the bank via a deed in lieu of foreclose or even if you go through a foreclosure you may face debt discharge income if the house is worth less than the mortgage.  You can also suffer debt discharge income from a foreclosure in certain instances as well.  There are some exceptions to this rule, and if you are insolvent (your liablities are more than your assets, you may not have a tax liability).  Check out the IRS website on debt discharge income and speak with a qualified tax professional in your area about debt discharge income and the Mortgage Forgiveness Debt Relief Act of 2007 to find out if it applies to you.  Under the Act, you may not be required to pay income tax on the forgiven debt.

• File Chapter 13 bankruptcy.  A chapter 13 bankruptcy can prevent the loss of your home if the foreclosure was due to temporary circumstances.  If you can now make your regular mortgage payment, but just can’t catch up on the past due amount, a Chapter 13 can make arrangements for a paying back the overdue balance without any late fees or interest.  In addition, if you have a wholly unsecured mortgage – for example, your house is worth 240,000, your first mortgage has a balance of 250,000 and your second mortgage has a balance of $50,000, since the second mortgage is wholly unsecured, you should be able to discharge the second mortgage in a Chapter 13.  But if one dollar of equity exists in your home for the second mortgage, you can’t discharge the debt.

• Work Out with your Lender:  Depending on how far behind you are, a lender could agree to put past due payments on the “back” of the loan, so you catch up with your past due payments because the loan term is extended by the numbers of months you are past due.

• If you have an FHA Loan, then call 1-800-CALL-FHA, to learn about the different programs available to borrowers who have FHA mortgages.

While solutions is right for you?  Contact a bankruptcy attorney and a tax professional in your area and get the answers you need to make an educated decision.