Is Bankruptcy the Best Way to Avoid Foreclosure and Keep Your Home?
Is Bankruptcy the Best Way to Avoid Foreclosure and Keep Your Home?
Depending on your situation, bankruptcy may be the best way to avoid foreclosure and keep your home. Before filing bankruptcy, you should step back and assess your individual situation. Just because something works for someone else does not mean it is the best option for you. Each person’s situation is unique to their specific circumstances. Some things you should consider before filing bankruptcy:
Should you consider selling your home? If so,
- Regular Home Sale,
- Short Sale, or
- Deed in Lieu of Foreclosure
Are there other ways you could save your home? Such as:
- Mortgage Modification
- Forbearance Agreement, or
- Repayment Plans
Will filing bankruptcy save your home? If so,
- What happens to back property taxes owed and/or other property liens?
- Will you owe income taxes on the amount of the cancelled debt?
If you are about to lose your home to foreclosure, it is a good reason to start thinking about bankruptcy as a fresh start. Make sure to consult with a qualified bankruptcy attorney immediately. If you wait too long, it may be too late to save your home. Starting the bankruptcy process can halt the foreclosure process, which may give you the necessary time to save your home.
Should You Consider Selling Your Home?
Paying off the debt is the easiest way to avoid foreclosure. If you have equity in your home, selling it to pay off the mortgage may be your best solution to protecting your credit and avoiding bankruptcy. One of the worst decisions a homeowner can make is allowing foreclosure to proceed when they have equity in their home. In a foreclosure sale, the property usually sells for less than in a regular home sale. Typically, foreclosure sales attract limited buyers, who want to purchase properties at discounted rates. The process discourages your regular home buyer, who would be willing to pay market value for your home. If you can sell your home, as part of a regular home sale, you can use the proceeds to pay off the mortgage, pocketing the difference.
If you owe more on your house than its market value and your lender has denied your request for a mortgage modification, repayment plan, or forbearance (reviewed below), two other options you should consider are either a short sale or a deed in lieu of foreclosure. To sale the property, you will need permission from your bank. This is called a short sale. When a lender approves a short sale, they are agreeing to accept less than the amount of the mortgage.
In a deed in lieu of foreclosure, you can transfer your deed to the lender, and the lender agrees to release you from the mortgage obligation. Usually, a lender will only agree to this arrangement, if there are no other liens on the property. Also, typically, lenders will require homeowners to try and sale their homes first.
Also, it is important to remember two things:
Possible Deficiency Judgment
Unless the agreement with the lender for either the short sale or deed in lieu of foreclosure specifically states that the transaction is in full satisfaction of the debt, the lender may file suit against the homeowner for a deficiency judgment. For short sales, the deficiency is the difference between the sale price of the property and the total debt. For deed in lieu of foreclosure, the deficiency is the difference between fair market value and the total debt of the property. Some states do not allow deficiency judgments for short sales and deed in lieu of foreclosure transactions. However, Arizona allows lenders to pursue deficiency judgments against homeowners, who have not paid off their mortgage in full. This is one of the many reasons, it is important to seek the advice of a qualified attorney.
If the lender forgives a part of or all the deficiency for an amount of $600 or more, they are required to issue you a 1099-C for cancelled debt and report the amount forgiven to the IRS. Unless you qualify for an exclusion or exemption, the amount of cancelled debt will be included in your gross income and taxable for the tax year it was received.
Short sale or deed in lieu of foreclosure can be better options for some homeowners, who do not have adequate income to support a mortgage modification or payment plans and are not ready to file bankruptcy.
Lenders often have a loss mitigation department that offers other solutions to homeowners to save their homes when they fall behind on their mortgage. If you qualify for a mortgage modification, repayment plan, or forbearance, it can help you avoid foreclosure and save your home. These options do not work for everyone, as the lender will look at your financial situation to determine if these are practical options.
Of the three, mortgage modification usually is the best option, if you qualify, as it provides a long term, more permanent solution. With mortgage modification, the lender typically will lower your interest rate and extend the length of the term of your loan, if needed, to bring your loan payments down to an affordable level. Although a good option for some homeowners, you will be required to provide financial information to show the new payments are manageable. Most lenders will require homeowners to complete a trial period, where they must make the revised payment to show that it is doable.
Most lenders offer a repayment option. Usually, under a repayment plan, the amount of past due mortgage payments is divided out over a certain number of months. If you can prove you can afford the higher monthly payment, it gives you the opportunity, usually over a period of 3 – 6 months to get caught up on your mortgage payments. After the repayment period ends, your mortgage payments drop down to the amount they were before the payment plan was put into force.
Forbearance provides a short-term answer, which depending on your individual situation may be the help you need to get through a challenging time. If the lender grants forbearance, they are agreeing to suspend or decrease payments for a certain amount of time, usually 3 – 6 months. Also, the lender is agreeing not to pursue foreclosure, while the borrower is in forbearance. If you are having a tough time making your mortgage payments and you expect the period to be temporary, forbearance can help you avoid foreclosure. Also, if the hardship continues, some lenders will allow you to extend the forbearance period.
Should You Consider Filing Bankruptcy?
Finally, after reviewing your situation and available options, you should consider if filing bankruptcy will bring the relieve you need. There are many situations where the options listed above will give borrowers the help they need to establish a doable budget and regain their financial footing. However, there are several red flags that bankruptcy may be the best option for you:
- a) Are you considering raiding your retirement account to borrow or take out money to pay off unsecured debt like credit card and medical debts;
- b) Do you have credit card debt (including interest) that would take you more than 5 years to pay off?;
- c) Are you about ready to retire and getting ready to live on a fixed income that is not enough to support your debt load?;
- d) Are your wages being garnished?; or
- e) Is your home about to be lost in foreclosure?
If you answered yes to any of these questions, it is worth taking a closer look at bankruptcy to see if it would give you the fresh start you need and be able to reduce your debt load and save your home. Please see below for some important things to consider like: will filing bankruptcy save your home, what happens to liens on the property for back owed taxes, water or sewage bills, and other property liens, and will you owe income taxes on the amount of cancelled debt.
Will Filing Bankruptcy Save Your Home?
You may be able to save your home by filing Chapter 13 Bankruptcy. Filing Chapter 13 allows you to pay the past due on your mortgage over the course of 5 years. It divides the amount past due by 60 (5 years x 12 months) and adds that amount to your monthly mortgage payment. For example, if your mortgage payment is $1,000 a month and you are 6 months behind (or $6,000 (6 x $1,000)), it will add $100 a month ($6,000 / 60 months) to your monthly mortgage payment. Your new monthly mortgage payment will increase to $1,100 ($1,000 original payment + $100 monthly payment). It is important to realize that your mortgage payment will increase, not decrease, so you will need to show you have sufficient income to support the new increased payment. However, it can give you time to make the past due payments and catch up rather than having the lender pursue foreclosure to collect the amount in full.
Also, when you file bankruptcy, you are allowed certain exemptions for property. In Arizona, you are allowed a $150,000 exemption for your home. For example, if your home’s market value is $100,000, but you have a $90,000 balance on your mortgage, you can claim the $10,000 as an exemption for your home (way below the $150,000 allowable exemption). For additional information on some of the allowable property exemptions in Arizona, please see the article titled, Property Exemptions in Bankruptcy.
What Happens to Back Property Taxes Owed and / or Other Property Liens?
Although certain types of income tax liens are dischargeable in bankruptcy, most liens attached to your home are not dischargeable in bankruptcy. They survive because the law views them as attached to the property, not against you personally. The liens, generally, are only satisfied, if they are paid off or if the property is sold (or foreclosed) and there were not enough funds from the sale to pay off the liens.
This means that the liens against your property for unpaid property taxes will survive bankruptcy. Property tax liens are attached to the property, and they are not discharged as part of the bankruptcy process. This means the liens will be one of the items that is still due after the bankruptcy process is completed, if they remain unpaid unless you sold the property (or it was foreclosed).
Water, Sewage, and Other Property Liens
Like property tax liens discussed above, most liens attached to property, continue to follow the property. This means that if you keep the property, the liens will not be discharged in bankruptcy and will continue to be held against the property until it is sold. If the property is foreclosed and it does not sell for enough to pay the liens on the property, then the liens will be extinguished as part of the foreclosure process.
Depending on your individual situation, it may be best to sale your home to get out from underneath some of the debt, as bankruptcy, typically, does not remove debt associated with your home including mortgage payments and liens attached to your property. However, it can help you catch up with mortgage payments, if you want to save your home. Also, filing bankruptcy can free up other income that you were using to pay other debts, so you can use this newly freed income to payoff the past due mortgage payments and / or liens.
Will I Owe Income Taxes on the Amount of the Cancelled Debt?
This is a huge benefit of filing bankruptcy: debt cancelled (discharged) as part of the bankruptcy process is not considered taxable income by the IRS. If debt is cancelled outside of bankruptcy, unless you qualify for an exemption or exception, it is typically taxable as gross income. Debtors, who cancelled debt, are required to report the amount forgiven to the IRS and taxpayer on form 1099-C. This means that if your tax bracket is 25%, and you have $10,000 discharged by your credit card company outside of bankruptcy, when you file your taxes, you will owe an additional $2,500 ($10,000 x 25%). If the same $10,000 amount was cancelled as part of the bankruptcy process, your additional taxes owed on the $10,000 cancelled debt would be $0. For additional information on how to avoid paying taxes on debt cancelled outside of bankruptcy and how debt cancelled inside bankruptcy is handled by the IRS, see the article titled, Do You Pay Tax on the Amount Discharged in Your Arizona Bankruptcy?
Is Filing Bankruptcy Best for You?
Filing bankruptcy can be a confusing process. If you are facing foreclosure and are considering bankruptcy, it is important you consult a qualified bankruptcy attorney immediately. If you wait too long, it may be too late to stop the foreclosure process. Make sure you have the right information and file the chapter of bankruptcy that is best for your individual situation. Make sure to let your attorney know if you are facing foreclosure or the possible of losing your home and whether you have any liens on your property. Contact Trezza Law for a free consultation to determine if bankruptcy is right for you. If filing bankruptcy gives you the fresh start you need, Trezza Law will review in detail which chapter of bankruptcy is most advantageous for you to file and the amount of property exemptions that are applicable to your individual situation.