Tuesday, May 25, 2010

Dealing with House Debt: Short Sales, Foreclosures and Bankruptcy - Part I

In this Three-Part Post, we will evaluate some of the different methods of dealing with real estate debt when a mortgage modification or forbearance agreement is not an option.
  • Part I addressed the most common scenario which forces a homeowner/borrower to consider how to deal with property he or she can no longer afford.

  • Part II will address short sales and their interactions with Bankruptcy.

  • Part III will address "walking away" from a property through bankruptcy, and the resulting foreclosure by the lender.

Part I: How did we get here? Where exactly is "here"?

Many homeowners today have negative equity in their homes, that is, they owe more on the mortgage than their homes is worth. This may be due to any number of factors, most commonly resulting from a combination of purchasing the property during the "housing bubble" of the early to mid 2000's, jumbo mortgages which finance 90% or more of the purchase price, and the use of "home equity loans" to fund consumer expenses. If you are current with your mortgage payments and plan to stay in your home, the "solution" to this problem is to basically wait out the market until home prices rise again or you have paid off enough principal of the mortgage to create positive equity in the property.

Homeowners encounter serious problems when they cannot pay (and have not paid) the mortgage and they have negative equity in the property. Perhaps the homeowner took on a mortgage payment that they could not afford - i.e., purchased "too much house" - or some other temporary situation has impacted the homeowner's finances such as an unexpected medical expense, loss of a job or other significant interruption in income. In any case, the bank may be threatening foreclosure, the homeowner is in jeopardy of loosing their home, and the value of the property at foreclosure auction is not enough to pay off the balance of the mortgage, resulting in an individual liability by the former homeowner to the bank for tens, if not hundreds, of thousands of dollars.

At this point, homeowners weigh their options and understand that they can no longer afford to keep the house. They can't afford the payments, and realize it is a loosing proposition to struggle to pay into a property that has negative net value. Assume for this scenario that the debtor's financial situation does not permit a mortgage modification. Perhaps the mortgage has already been modified; the borrower does not qualify for a modification; a modification has been denied; or the borrower's income is insufficient to to continue to make any payments, due to job loss or medical illness. After conducting some research, the homeowner is now weighting two options: A Short Sale of the property and/or Bankruptcy.

... to be continued...

Dealing with debt can be a daunting challenge for many individuals. Don't go alone. An attorney with Kelsey & Trask, P.C. can help you make these difficult decisions, and help you with the process. For a free initial consultation, click here, or call 508-655-5980.

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