To stop mortgage foreclosure, you may have to take swift and drastic
action. This is particularly true if: a loan modification or refinance
is out of the question because your home is worth so much less than what
you owe on your mortgage; your lender refuses to work with you (and
an attorney cannot help you); you do not qualify for any of the
government programs designed for homeowners in your situation; and/or
you are out of a job and have no prospects for landing a new, well
paying job anytime soon.
If any or all of these scenarios apply to you, it’s time for you to face facts, swallow your pride and consider more drastic measures. These options to stop mortgage foreclosure may include:
Short sell your home. A short sale involves getting permission from your lender to sell your home for less than what you owe on it. Even though you will have to leave your home, it will help you stop mortgage foreclosure and avoid the problems that can cause. However, a drawback associated with a short sale is that you could owe taxes on the amount wiped out. Here's why:
Your lender will report the amount of the loan deficiency -- the difference between your outstanding loan balance and the amount that your home sells for -- to the IRS on a form called 1099-C. (Forgiven debt is usually considered taxable income.) As a result, you could be expected to pay income taxes on the amount forgiven.
However, the Mortgage Forgiveness Debt Relief Act of 2007 allows you to exclude income from discharged debt on your primary residence as long as the principal balance on your loan was less than $2 million ($1 million if married and filing separately) at the time the loan was forgiven. But if you refinanced your home and used the proceeds for purposes other than home repairs or renovations, then this exclusion may not apply to that portion of your loan balance. Even then however, if you can proof to the IRS that you are insolvent or broke, then you won’t be taxed on the amount of your loan deficiency. If you have any questions about whether you will owe taxes on home loan debt that has been forgiven, consult a tax professional sooner rather than later.
Walk away from your mortgage. You can consider using a deed in lieu of foreclosure to transfer your home back to your lender. (This is also known as a "voluntary conveyance.") While you may be under the impression that to make this transfer you can just mail your keys to the lender and be done with it, it’s not that simple. You may have to first put your home on the market and demonstrate that you cannot sell it, or your lender may expect you to get your home appraised. If the appraisal shows that it’s worth less than what you owe on it, the lender will expect you to pay the deficiency, and if you can’t afford to pay it, your lender may decide to foreclose on your home. In other words, it may not be as easy to walk away from your home as you think. But if your lender agrees, a deed in lieu will allow you to stop mortgage foreclosure, and may help you avoid additional costs and hassles. You’ll want to be sure to get legal advice if you are considering this route.
Beware of mortgage deficiencies: When you lose your home, you may be on the hook for the difference between what you owed - including foreclosure costs - and the fair market value of your home at the time you lost it. Some states don't allow deficiencies, but in those that do, a number of lenders are coming after consumers for these deficiencies. This can happen even if your home was sold in a short sale to which the lender agreed. Make sure that if you are considering a short sale, deed in lieu of foreclosure, or a foreclosure, that you get a a free consultation with a bankruptcy attorney to find out if you could be on the hook for a deficiency. Losing your home is stressful enough. Finding out several years later that you still owe the lender makes it that much worse!
Also Important: Make sure you are off the hook! An increasing number of former homeowners are finding themselves in limbo after they surrender properties with a deed-in-lieu of foreclosure, or in bankruptcy. The problem is that, until the lender legally takes title to the property, you are still the owner of record. If there are code violations due to neglect of the property, for example, you may be the one fined for them! Some lenders are dragging their feet for months or years, leaving former homeowners in limbo. This is another example of why it is crucial to get legal advice if you are surrendering your property.
File for bankruptcy. Can bankruptcy stop mortgage foreclosure? In many cases, it can. Filing for bankruptcy will stop your mortgage foreclosure immediately. But it doesn't make your home loan go away. (Although there are some bankruptcy attorneys who have successfully helped consumers discharge - wipe out - second mortgages or home equity loans in cases where the home value is less than the first mortgage. Consult an attorney if this is your situation.)
In the end however, it may or may not help you keep your home and it will not wipe out your mortgage debt. If you file a Chapter 13 reorganization bankruptcy (where you pay back some or all of your debt), you’ll get three to five years to pay off the amount of your mortgage arrearage (the amount of your mortgage that is past due), all of the late fees you owe, and any foreclosure-related expenses your lender has incurred. While you are in Chapter 13, you’ll have to continue making your regular mortgage payments, however.
If you can’t afford a Chapter 13, a Chapter 7 liquidation bankruptcy will wipe out much of your debt, but not the outstanding balance on your mortgage. However, it’s possible once you’ve gotten rid of the rest of your debt that you’ll be able to pay off your mortgage arrearage, which would mean that when you emerge from bankruptcy -- probably 6 to 8 months after you’ve filed -- your mortgage would be current and you’d no longer be in jeopardy of losing your home. If you are not able to pay off the arrearage, it’s time to give your home back to the lender.
Tip: Some bankruptcy attorneys have been successful at using bankruptcy to wipe out second mortgages or home equity lines of credit (HELOC) in cases where the home was worth far less than what was owed on it. These attorneys have done that by getting the second mortgage or HELOC treated as “unsecured” debt, which is dischargeable in bankruptcy. This is why it is so important to get a free consultation with a bankruptcy attorney if you are facing foreclosure.
Action Alert: The U.S. House of Representatives passed legislation to help homeowners save their homes by letting bankruptcy judges force lenders to modify loans when the homeowner could afford to make lower payments. (This option used to be available before the federal bankruptcy law was amended in 2005.) However, the Senate has refused to pass this legislation, even though it would provide a solution to the foreclosure crisis at no cost to American taxpayers. Let your elected officials in Congress know if you support a revision of the bankruptcy law to allow bankruptcy judges to modify mortgage in cases where it makes sense to help homeowners stay in their home.