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FORECLOSURE: Will I Lose My Home?

The door bell rings. As you open the door, you are greeted by the sheriff who serves you with your foreclosure papers. Your smile turns into a look of panic. As you close the door, you are wishing that you didn’t answer the door bell. Your heart beats rapidly as your’re reading through the documents. The only thought that keeps running through your mind is that you’re going to lose your home…..

Unfortunately as the foreclosure numbers keep rising, this scene is becoming increasingly common for many homeowners. Every day the media reminds us of the rising foreclosure figures and decreasing property values and home sales. So even if you want to sell your home to get out of foreclosure, chances are it’s not as easy as it sounds.

The good news is that are options available to you. The fact that your home is in foreclosure does not leave you powerless. But in order for you to get control of the situation, you must know your options. Knowledge is power. Once you know your options, you can identify which options best suits your objective. Let’s begin with a brief introduction into the foreclosure process.

Foreclosure Lawsuit

The foreclosure process varies with each state. It is either an in court (judicial foreclosure) or out of court (nonjudicial foreclosure) proceeding. Illinois is a judicial foreclosure state. In judicial foreclosure jurisdictions, the lender begins the process by filing a foreclosure lawsuit. You should treat this as an important warning that the foreclosure process has started. You will receive notice of the lawsuit from the sheriff or process server. It is a notice from the lender or lender’s servicer letting you know that you are behind in your mortgage payments (default). This notice provides you with a certain period of time to respond to the foreclosure lawsuit and raise any defenses, if any. You can do one of two things; contest the foreclosure or let it proceed. If you do respond the court will set a date for a hearing. If you do not respond or you are unsuccessful at your court hearing, the judge may enter a judgment of foreclosure. A judicial foreclosure has its benefits because the process takes much longer than a fonjudicial foreclosure (out of court). This affords you the opportunity to look into your options.

There are several types of notices that you may receive during the foreclosure process. This depends on state law and where you are in the foreclosure time line. Some states even combine their notices. Notice of Default. Notice of Acceleration, and Notice of Sale are different types of notices.

A notice of default advises you that you are behind in your mortgage payments, The amount that you are in default in called the “arrears.” If you can ppay the total amount of the arrears, the lender will accept the payment and you will avoid foreclosure. Partial payments are typically rejected unless they are made part of a workout agreement or loan modification. If you are unable to cure the default, your should start look for different solutions.

After a certain period to time, the law permits the lender to treat the whole balance as due immediately. This is referred to as “acceleration.” Some states combine the notice of default with the notice of acceleration. The notice will say that the whole balance is due and payable. This typically occurs after the period for “curing” the default has passed. As such, you are required to pay the full balance as opposed to the arrears only. This is a good indication that the foreclosure process is moving quickly.

Depending on the state you are also entitled to certain rights,; the right to reinstate and the right to redeem. The right to reinstate gives you the opportunity to reinstate your mortgage after the acceleration period. This “second chance” allows you to reinstate your mortgage by paying the arrears. This means getting caught up on the missed payments and foreclosure fees and costs.

You are also allowed to “redeem” the home up to the time of a foreclosure sale, and in some states, after the foreclosure sale. In order to redeem, you must pay off the full amount of the loan in one payment including the lender’s foreclosure fees and costs. So instead of paying off the arrears, you are required to pay the full balance of the mortgage. Most people don’t have the financial resources to redeem.

Foreclosure Sale

The length of time you have before your property is sold varies with each state, Also, not all lenders are the same. Some lenders move more quickly than others. Foreclosure can take as little as three months and as long as a year or more. The average time being six months. However, this is no longer necessarily true because of the high volume of recent foreclosure actions.

Notice of sale represents your last chance to do something to save your home. The sale date is the most important deadline in the foreclosure process because the sale cuts off your rights as owner of the property. Sale of the property removes your opportunity to obtain a workout or to use the bankruptcy process to prevent foreclosure. For this reason, you must act before the sale date if your want to save your home. Bankruptcy stops the foreclosure sale. (refer to Chapter 13 bankruptcy for further details.)

Foreclosure Options

First and foremost you should decide whether or not you want to keep your home. This can be a hard decision because there are financial, emotional , and family considerations. For most people saving their home is the best choice but for others giving up their home is the best financial choice. In making your decision you should balance the following: your property is worth substantially less than what you owe; your monthly payments are too high and you are unable to negotiate an affordable payment with your lender; cost and effects of moving you and/or your family; costs, benefits, and disadvantages of renting; tax benefits of home ownership; and potential for future equity in property.

If you decide that you do not wish to save your home, a sale, a short sale, a deed in lieu of foreclosure are some of your options. Keep in mind that if your property is sold at a foreclosure sale, you may still be responsible for the deficiency balance (the house sold for less than what you owe). Illinois recognizes deficiency judgments. Deficiency judgment are dischargable in bankruptcy (refer to Chapter 7 or Chapter 13 Bankruptcy for further details).

If you have decided that you would like to save your home, you must next determine if you will be able to make your future mortgage payments. Some peoples are facing foreclosure because they had unexpected expenses that caused them to fall behind. They can afford the mortgage payment but they don’t have the funds to cure the mortgage deficiency (arrears). Others fall behind in their payments because their monthly mortgage payment has increased and they can no longer afford the new monthly mortgage payment. In other words, their expenses exceed their income. To succeed, you must be able to cure the mortgage default and have the ability to make your future mortgage payments. There is no point in finding a solution to pay off the past-due amount if you cannot make your future mortgage payments because you will only fall back into foreclosure. You need a solution for both.

Review Your Income & Expenses

Take a look at your income and expenses and see if your current mortgage payment fits within your budget. If not, you will need to find a way to lower your monthly expenses or increase your monthly income. Loan modifications and bankruptcy are methods of reducing your monthly expenses. If you cannot afford your current mortgage payment, you should consider a loan modification to see if your lender will reduce your monthly mortgage payment. If your expenses are too high, you should consider bankruptcy to reduce your debt and lower you monthly expenses.

Curing the Default

There are several solutions for dealing with the mortgage default. These include: mortgage workouts or loan modifications, refinancing, Chapter 13 bankruptcy, or a combination of both.

One way to prevent foreclosure is to see if your lender will agree to a mortgage workout. A workout is a temporary or permanent change to the terms of your mortgage. It is a repayment agreement that lets you get caught up over a period of time. There are many types of workout agreements such as a loan modification. A loan modification may enable you to add the default into the principal, reduce your monthly payment, and/or lower your interest rate. The key is to find a workout that meets your needs and is acceptable to the lender. Not all lenders offer the same workout agreements. You should check with your lender to see what options are available for you.

Keep in mind that the process may be very long and it may or may not stop a foreclosure sale. It is very important that you monitor your foreclosure. Not all lenders postpone scheduled dates during the course of workout negotiations. Lenders have different approaches in suspending the foreclosure date. It is not uncommon for a property to be sold while a workout or loan modification application is pending. I have had a number of clients contact me a day or two before the foreclosure sale because their lender waited until the last minute to tell them that their loan modification was denied . I most case, I was able to stop the sale through the bankruptcy filing. In some cases, there was not enough time. Do not rely on the loan modification to stop the sale. You should contact a bankruptcy attorney early in the process to discuss different strategies in dealing with foreclosure.

You may consider refinancing if you are in the early stages of the foreclosure process; have equity in your property; and your current lender will not agree to a reasonable workout. If you decide in favor of refinancing, you may need a credit worthy cosigner. Unfortunately, most lenders will not finance if you are already in foreclosure. Don’t take it personally. The stricter guidelines provoked by the foreclosure process makes it difficult for most people to obtain a home mortgage. You should search for a reputable lender with flexible guidelines. Some lenders actively solicit financially distressed people for refinancing via the mail, phone, or email. Be careful to avoid unscrupulous lenders who charge outrageous interest rates. You should make every effort to obtain a loan at a reasonable rate.

Chapter 13 bankruptcy is probably the most effective way to save your home. The filing of a Chapter 13 brings an immediate halt to the foreclosure proceeding (there are exceptions that apply for repeat bankruptcy filers). There are many benefits to filing Chaper 13. The benefits begin the minute the case is filed with the court. Not only do you have the benefit of the automatic stay which stops foreclosure and creditor’s actions against you, but it also stops most interest , fees , and costs from accruing. Chapter 13 allows you the opportunity to cure the default (within 3-5 year period) and reduce or eliminate part of your debt. The proposed repayment plan is filed with the court. The plan outlines your repayment terms. The court must approve the proposed Chapter 13 plan. Many clients who file Chapter 13 also apply for a loan modification.

One of the greatest features of a Chaper 13 is the ability to eliminate the second or third mortgage. If you are like many homeowners, your home is encumbered by a first and second mortgage. So if the first mortgage holder has initiated a foreclosure action, you are probably behind in your second or third mortgage payment as well. If you could eliminate the monthly expenses of a second or third mortgage, you would reduce your monthly expenses which may enable you to make timely first mortgage payments. The secured debt now becomes an unsecured debt. In other words, it significantly reduces the total amount, that you once owed the second or third mortgage holder and best of all, you have changed the status of the debt from secured to unsecured (you must complete the plan to accomplish).

Whether its refinancing; loan modification; Chapter 13 bankruptcy, or a combination of both, the best course of action you should take immediately is to educate yourself of all of your options. With a good understanding of your options, you will gain control over the situation and you will be able to make an informed decision that is right for you.

My Final Word

My clients often ask me whether or not they should try to save their home. This can be a difficult question to answer. The decision of whether or not you should save your home involves financial as well as emotional considerations. An attorneycan provide you with legal advice, the feasibility of filing a Chapter 7 or Chapter 13 bankruptcy, alternative debt-related solutions, a course of action to obtain your objectives, but he or she cannot tell you what is best for you. Only you know what is best.

A few years ago, I represented a married couple who filed a Chapter 13. They were significantly behind in their mortgage payments and were “upside side” on the house (home was worth much less than what they owed). They had 2 adult children still living at home and they were extremely adamant about keeping their home. It wasn’t that they really liked their home. They were planning on moving once the children moved out. As a matter of fact, I am not sure they really cared about the house. What they did care about was their children and it was apparent to me that they cared a lot. They make it very clear that it was important for them to keep the home until the children graduated college. Both husband and wife were working two jobs and they were putting a lot of energy in saving their property. I did not think it was in their best interest to keep the property. The mortgage payments were high, they were working crazy schedules that had an impact on their marriage, and they were stressed. Financially speaking it wasn’t a good idea but emotionally it was a good idea for them. What was really important to them was that they did whatever was necessary to save the property for their children. And they did their very best to do just that. I respected their efforts. Regardless of what happens in the future, I feel that they have succeeded. Success is not always measured by the outcome but in the effort you put in trying to achieve your objective. You may not be able to control your circumstances but you can control what you do to change your circumstances.

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