An overview of foreclosure, bankruptcy, and their consequences.
As the national foreclosure rate continues to rise, I’ve had several people ask me how it differs from bankruptcy. In this episode I’ll give you an overview of both legal processes and how they can affect your financial future.
You’re probably aware that foreclosure is the final option that a lender has when a borrower doesn’t pay their loan. It's a forced sale of the real estate that secures a loan. The proceeds of the sale allow the lender to recover all or a portion of the amount they’re owed by the borrower.
The Basic Foreclosure Process
The foreclosure process varies from state to state. I’ll put a link in the show notes where you can compare the state specific foreclosure laws. But when property is said to "be in foreclosure" this means that the owner's lender has begun the legal process to force the sale of the property. It starts once the lender files a public notice in the county records, called a Notice of Default or Lis Pendens. This puts everyone on notice that the borrower is facing foreclosure. If payments are not submitted to make the loan current, the lender’s next step is to announce the date of the foreclosure sale by filing a Notice of Sale.
The foreclosure sale is actually an auction that normally takes place on the steps of the county courthouse. The opening bid for the property is usually set by the foreclosing lender. If no one bids higher than the lender, they take ownership. Once a lender or bank owns a foreclosed property it’s called a Real Estate Owned or REO property.
The law allows a homeowner every opportunity to stop the foreclosure process. The borrower can make the loan current or sell the property at any time, right up to the minute the auctioneer says, “Sold”. In many states there’s even a period AFTER the foreclosure sale during which the borrower can get the property back with full payment. This is called a statutory right of redemption.
Ways to Avoid Foreclosure
If your debt problem is due to the fact that your house payment is too high for your income, consider these five solutions to avoid foreclosure:
If your financial shortfall is temporary due to a job loss, for example, as soon as you’re back on your feet your lender may agree to a repayment plan. This would slowly get you caught up on all missed payments, while you continue to make the regular monthly payments.
Negotiate a loan modification plan with the lender for a lower interest rate and/or longer payback term to lower the monthly payments.
Request forbearance, or a temporary suspension of payments, with the lender.
Request the lender take a “deed in lieu of foreclosure”. This means giving the property to the lender and walking away debt free. This may be attractive to a lender if the cost of foreclosure would be greater than their equity loss on the house.
Sell the house and pay off as much of the loan as possible. If your loan amount exceeds the sale price, this is called a short sale.