What Happens When You Walk Away From A Home Loan?
Deciding to walk away from a family home is a gut-wrenching decision. Before walking away the prudent person will investigate all of the options, including returning the property to the lender (i.e. a deed-in-lieu of foreclosure), a short sale, or renting the property. Unfortunately, for some walking away is unavoidable, so it is important to know the repercussions.
The first concern is safeguarding the property. Maintaining insurance and basic utility service is important until possession (and in some cases ownership) of the house is transferred. Should you fail to safeguard the property, you may be liable to the lender for damages.
Next, once transfer of title is accomplished (usually through a foreclosure proceeding), the bank may sue you for breach of contract and damages. Sometimes the bank will wait until after it fully realizes all of its damages upon sale of the house, then it will sue for the difference between the amount it recovers and the amount you owed. This is called a deficiency balance and it is recoverable by the lender in most states.
The bank may also forgive the debt difference and issue you an IRS Form 1099C. When this happens the bank is telling the IRS that it has given you a “gift” in the amount of its loss (because you don’t have to pay it back) and you owe income tax on the “gift” amount. You have two options to avoid paying the tax debt: bankruptcy, or the insolvency exclusion in the tax code. The insolvency exclusion requires that you prove that your liabilities exceeded the value of your assets. By filing bankruptcy this type of tax debt will be discharged.
Congress has granted a reprieve from tax debts stemming from the sale of your primary residence. The Mortgage Forgiveness Debt Relief Act of 2007 (H.R. 3648) provides that taxpayers do not owe taxes on mortgage debt that was forgiven by the lender. The law only applies to deficiencies during the 2007, 2008, and 2009 tax years.
Finally, walking away from your home will have negative consequences to your credit report. The possible negative items include 120 day late entries, foreclosure, and debt write-off. All of these items have a devastating impact on your credit report and, consequently, your credit score.
If you are contemplating walking away from your home, get the facts! Investigate your options from a qualified bankruptcy attorney. Only a bankruptcy attorney will be able to explain your options including those available under the bankruptcy laws.
Predatory Lending and Scams
Unfortunately, there are always unscrupulous people out there who are looking to take advantage of someone else’s financial desperation. Such people are called predatory lenders. These lenders target consumers who have few other financial resources and con them into loans or other agreements that usually are grossly one-sided in favor of the lender and end up with the consumer in worse financial condition than when he or she started.
If you are in a foreclosure, consult an attorney. Bankruptcy, loan modifications and refinancing are some of the ways to avoid losing your home. You need legal counsel experienced in these areas to review your situation with you. Also, avoid making your situation worse by following these precautions:
Avoid lenders who seek you out and make promises that sound too good to be true. Often the loans made by these lenders will contain harsh provisions that no borrower would ever sign if they were thinking clearly. Ridiculously high interest rates and stiff pre-payment penalties may be buried in the fine print. Also, the interest rates for such loans may not be “fixed” which means that the borrower’s monthly payments may soon sky-rocket and the consumer may find themselves back in foreclosure.
Do not deed your property over to someone who proposes to then “rent” the property back to you after they “catch up” the original mortgage loan. Once the property is deeded out of your name, the lender has the legal right to do with the property as it pleases. This may include selling or mortgaging the property. Since you are now merely a tenant of the property, your rights will be severely reduced and any of the profit made from the property’s sale will end up in someone else’s pocket.
Do not pay someone to work out a mortgage resolution for you. If you are eligible for a loan modification, you can apply for a refinance or modification program for free by contacting your lender. If you believe that you need help with this process, many non-profit reputable agencies exist who will assist you without you having to pay a large fee for their services. Most of my clients who have hired a for-profit “mortgage resolution” firm have told me that after receiving their large initial payment that the company never did anything to assist in the loan modification process.
Never make your mortgage loan payments to any party other than your mortgage company. Prior clients have advised that they were contacted by companies promising lower interest rates and much smaller monthly payments. The scammer insisted that the clients make payments only to the mortgage resolution company rather than to their lender. Ultimately it was discovered that the new company had never turned the payments over to the mortgage company but had instead kept them to apply against phony “fees” that they were charging the client. The result…foreclosure actions filed by the mortgage companies.
If you are facing foreclosure, consult an experienced bankruptcy attorney for legitimate advice.
Happy Holidays From Mortgage Lenders
The Associate Press is reporting that Citigroup Inc. will suspend foreclosures and evictions for 30 days. This moratorium will provide temporary relief for about 4,000 borrowers during the holiday season. Other lenders are expected to follow suit continuing a tradition that began last year for suspending foreclosures during the holiday season.
Thanks a lot.
A report release earlier this month by the U.S. Department of the Treasury indicates that many of the nation’s largest mortgage lenders are not doing enough to lower the numbers of home foreclosures. In one case the report found that after eight months of participating in the Home Affordable Modification Program (HAMP) Bank of America had registered a dismal 15 percent of the more than 1 million delinquent borrowers who are potentially eligible.
The HAMP, introduced in March 2009, provided guidelines for lenders to modify a home mortgage, such as capitalizing arrearages, extending a mortgage to 40 years and reducing the interest rate, until the payments get down to 31 percent of a borrower’s income.
One reason for the low numbers of loan modifications is that it is labor-intensive, according to John Rao, an attorney with the National Consumer Law Center. Mr. Rao testified to Congress earlier this year that lenders are not compensated for the labor-intensive process of a modification, whereas they are compensated for the extra work in foreclosing on a home. In other words, there is no real incentive to help the homeowner. Some lenders have delayed the loan modification process until the homeowner is forced to file bankruptcy and then add thousands of dollars in interest and costs to their home loans.
For homeowners that would benefit from a loan modification and a chapter 7 bankruptcy, lenders are especially reluctant to give permanent loan modifications, often offering interim loan modifications that last only two to three months. If the homeowner files for bankruptcy, the lender will often withdraw any workout plan leaving the homeowners further in debt.
The road to saving your home and easing your monthly debt obligation can be a perilous journey. It is best to use an experienced bankruptcy attorney to guide you through this difficult path. Until Congress decides to offer an effective program that offers real relief, bankruptcy can be a powerful option for saving your family’s home.
Surrendering A Home In Bankruptcy: What Is Your Responsibility Until The House Sells?
Our office often gets questions from clients about what responsibilities they have, if any, when they are surrendering their home in a bankruptcy. The simple answer is this: until the house is sold at a foreclosure sale, you own it and are responsible for the upkeep of the home.
These days, most mortgage companies and banks are in no hurry to have you move out of the home you are surrendering. There are always exceptions. However, the majority of mortgage companies would rather the house be occupied and taken care of than for it to sit empty and deteriorate or be vandalized. Many of our clients opt to stay in the home up until a week or so before the sale date in order to save money on rent. However, whether your intent is to stay until the sale or move out sooner, you need to continue to take care of the home as its owner. That means you continue to cut the grass, pay the utilities, pay your homeowner’s insurance, etc. In other words, you treat the real estate like you did before you filed bankruptcy and decided to give up the property. The difference is that you will no longer make mortgage payments.
There are exceptions where clients make arrangements with a mortgage company to turn over the keys and the mortgage company agrees to take possession of the property before the sale. If you can work out such an agreement, get it in writing!!! You want to make sure that the mortgage company will be paying the insurance and taking care of maintenance before you cancel your insurance policy, turn off utilities or stop cutting the grass.
DO NOT take light fixtures, appliances that came with the home, plumbing fixtures or any other item that is attached to the real estate. Also, avoid causing damage to the house when moving. You want to walk away as cleanly as possible to avoid issues that may be non-dischargable in the bankruptcy. If you have questions, you can always call us for advice!
Question: If a foreclosure action has already been filed in state court, can you still file a bankruptcy in order to save your home?
Yes. The filing of a Chapter 13 bankruptcy can stop the foreclosure action even if a judgment has already been entered against you and the sale of your home has been scheduled so long as the Master Commissioner has NOT actually sold your home. As soon as the bankruptcy case is filed, your bankruptcy attorney will contact the attorney for the mortgage company as well as the Master Commissioner in order to notify them of the filing and at that point no further action can be taken by the mortgage company to sell your home.
Your Chapter 13 plan filed with the bankruptcy court will propose to pay the mortgage company a certain amount of money each month to catch up on your past due payments. These payments are sent to your court appointed trustee who forwards them on to your mortgage company.
Of course, you must also be able to begin making your normal monthly mortgage payment in addition to a payment to the bankruptcy trustee. The advantage of filing a Chapter 13 is that you are given five years to catch up your past due payments at zero percent interest. On the other hand, mortgage companies usually require the past due amount paid in a lump sum payment in order to stop the foreclosure unless you are able to complete a loan modification.
If you do not have the ability to save your home from foreclosure, you may need to consider a Chapter 7 bankruptcy to protect you from garnishment if the mortgage company ends up with a deficiency judgment against you. This would occur if your house sells for less than what you owed on it.
Question: What is the difference between a Chapter 7 bankruptcy and a Chapter 13 bankruptcy?
When you elect to file for Chapter 7 Relief, you seek to have most if not all of your debts eliminated or discharged. However, in order to receive the discharge, you must be prepared to allow a bankruptcy trustee the right to sell any of your non exempt property for the purpose of turning over the sales proceeds to your creditors. Your bankruptcy attorney will be able to determine and advise you as to whether your assets are exempt and protected from sale by your trustee.
If you don’t want to lose your nonexempt property, you may want to consider filing a Chapter 13 which is a repayment plan that proposes to pay back some, but not necessarily all of your debt including your credit cards and medical bills. The amount you have to pay back depends on the amount and type of debt that you have, how much property you have, and how much money you make.
If you are looking for a way to save your home from foreclosure, then filing a Chapter 13 Bankruptcy may be the solution. You can immediately stop the foreclosure process by filing a Chapter 13 Plan that allows you to cure your home mortgage arrearages over five years.