Although the housing market has been on the rebound the past couple of years, many homeowners are still faced with the predicament that they owe more money on their house than what its worth. If you are in this same predicament, you have to ask yourself ultimately what do you want to do about the house...do you want to keep it with hopes of the market rebounding someday? Or do you want to walk away from it? I will address what your options are and what ramifications that you may face depending on what you decide to do.
Scenario 1: Let's start with the simple scenario that you want to walk away from the house. Your options will depend on whether you have one mortgage or more than one mortgage such as a Home Equity Loan or a Line of Credit. If you only have one mortgage, walking away from the home is much easier and has less ramifications. If you only have one mortgage and want to walk away from your home, your options are as follows:
(1) Short Sale: You can sell it for the best price as possible and should the offers be less than what you owe on your mortgage, you will have to negotiate with the mortgage company to agree to take less than what you owe. This is typically what is known as a "Short Sale." Typically what is reported to the credit report agencies after a Short Sale is that the mortgage debt was settled for less than what was owed.;
(2) Foreclosure & Do Nothing: If you have fallen behind on your mortgage payments, your mortgage company has the right to file a Foreclosure if you more than 3 months in default. If you do nothing to defend against the foreclosure, the mortgage company will sell the property in a Foreclosure Sale, typically 6 to 9 months after the foreclosure is filed. Usually there will be a deficiency balance that remains after a foreclosure sale. If so, although your mortgage company can come after you for that deficiency balance, they typically will not. However, the foreclosure will be damaging to your credit and it will take a few years to rebuild your credit.
(3) Foreclosure & Offer a Deed In Lieu of Foreclosure: If a foreclosure has been filed, and you want to walk away from your home, you may want to negotiate with your mortgage company's foreclosure attorneys what is called a "Deed In Lieu of Foreclosure." This basically is telling the bank, "I don't want the house anymore and I want to avoid the foreclosure, so here are the keys. But, I don't want to be held liable for any deficiency, so please forgive any deficiency balance." In some instances, the mortgage company will agree to this to avoid incurring additional attorneys' fees and costs related to the foreclosure. However, they may require first that you try to sell the house via a Short Sale. A Deed In Lieu of Foreclosure will result in a less damaging effect on your credit report than a Foreclosure. Typically what is reported to the credit report agencies is that the mortgage debt was settled for less than what was owed.
Scenario 2: If you have more than one mortgage and you owe more money on both of your mortgages than what your house is worth, the three options above typically are not available to you. A Short Sale would almost be impossible because you would have to negotiate with all of your mortgage companies to accept less than what is owed. Although you may be able to get the first mortgage company to agree to that, the second mortgage company will likely not agree. Likewise, a Deed in Lieu of Foreclosure would not be possible, because your first mortgage company would not be able to accept a Deed In Lieu of Foreclosure knowing that there is a second mortgage. And, if a foreclosure is filed and if you do nothing and the property is ultimately sold in a foreclosure sale, there will most likely be a deficiency balance on the first mortgage and you will still be liable on the second mortgage debt. The second mortgage company will likely file a lawsuit against you for the amount owed. So, what are you to do? A Chapter 7 Bankruptcy (or a Chapter 13 Repayment Plan if you do not qualify for Chapter 7) is your best option to be relieved of any and all liability from the foreclosure and other debt that you may have. A Chapter 7 would discharge you of any deficiency balances owed on the first and second mortgages, as well as other unsecured debt that you may have such as credit cards, medical bills, etc. If you do not qualify for Chapter 7, a Chapter 13 would allow you to repay a percentage (usually pennies to the dollar) of any deficiencies and other unsecured debt over a period of 3 to 5 years.
Scenario 3: If you want to keep the house and If you have more than one mortgage, such as a Home Equity Loan or Line of Credit, you should keep up with your first mortgage and second mortgage payments as well. There is one caveat though. And that is, if you owe more money on your first mortgage than the Fair Market Value (FMV) of your home, a Chapter 13 Bankruptcy would allow you to strip that 2nd mortgage because there is no equity for that lien to attach. The 2nd mortgage would then be classified as a general unsecured debt, which can be paid back at a percentage (usually pennies to the dollar) as well as your other unsecured debt such as credit cards, medical bills, etc. over a period of 3 to 5 years. The second mortgage lien would be released upon completion of the Chapter 13 plan and discharge.
Scenario 4: If you want to keep your house and you only have one mortgage, keep up with the status quo and continue to make your mortgage payments.
If you are faced with any of these scenarios and want to learn more about what your options are, please call us at (630) 465-0713. GILBERT R. DIZON - ATTORNEY AT LAW is a boutique law firm representing consumer bankruptcy clients in Chapter 7 and Chapter 13 cases since 1996. With convenient office locations in Geneva, Illinois and Rockford, Illinois, we are able to represent clients throughout the various counties in Northern Illinois including: Kane, DuPage, McHenry, DeKalb, Winnebago, Boone, Ogle, Stephenson, Kendall, Will and Cook Counties.
Our attorneys have been recognized by Judges, Attorneys, Trustees and other members of the legal community for their professionalism, tenacity and hard work ethic in protecting our clients' rights and property. Be assured that when our attorneys represent you, protecting your rights and property is our highest priority.
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