Options for Owners With Overdue Payments

QUESTION: I am in deep financial trouble. I lost my job, and am several months behind in my mortgage payments. The bank has sent me a demand letter indicating I will lose my house unless I bring my payments current. Unfortunately, this is not possible. The equity in my home is around $50,000, and I would prefer not to lose that equity if possible. Can you give me some suggestions to save my house?

ANSWER: This is a problem that unfortunately is happening with increasing regularity as people are beginning to feel the impact of the recession.

There are a number of options available to you, but I must advise you from the outset that the chances of saving your house ultimately are not good--unless you are able to get back on your feet financially in the realistic future.

Most lending institutions do not want to own your house. The recent recession has put many homeowners in trouble, and the real estate market (while it appears to be coming back) has been stagnant for a long period of time.

As a result, if the bank forecloses on your property, for example, the bank would have to sell the property. In today’s economy, lenders will do everything in their power not to take over real estate--unless, of course, there is plenty of equity in the house, in which case the lender can resell the property at a low price, but still break even or even make a profit.

The first thing I would do is to meet with the lender and have a face-to-face discussion. Try to work out an arrangement with the lender, whereby they give you a moratorium on payments, or significantly reduce your monthly mortgage payments for a period of time until you are financially able to catch up. Obviously, the interest on the unpaid balance will continue to accrue, and indeed you might want to consider giving the bank a slightly higher interest rate during the workout period as an incentive for them to work with you.

Unfortunately, having a face-to-face discussion with a mortgage lender in today’s world is often difficult, since mortgage lenders generally are no longer in your hometown. If your lender is not readily accessible, I suggest that you write them and then pick up the telephone and make arrangements to talk to a senior official at the mortgage lending company.

If these negotiations do not work out, or if there is little possibility that you will resolve your financial problems in a reasonable period of time, then you have to look to other approaches.

You have indicated that you do not want to lose the equity in your home. That suggests to me, at least, that you might be willing to sell the property, if you can find a buyer at a price somewhat over your existing mortgage. Try to sell the house--either by yourself or with a real estate broker. Set a price that is lower than the market value of your house, so that you may be able to find a buyer who is looking for a bargain. For example, if your house or condominium is worth $200,000 and your mortgage is $150,000, you may be able to find a buyer for $175,000, which will at least give you some return of your equity. Lenders will often postpone taking any legal action against you if you can demonstrate that you are actively trying to market your property.

However, as we know, selling your house--even at a bargain price--may not be easy to accomplish.

Thus, you might want to consider giving the property back to the lender through a process known as “a deed in lieu of foreclosure.” Under this arrangement, the lender can take title to your property, wipe out your existing mortgage, and you will be off the hook. Obviously, under this approach, you will lose all of your equity.

The advantage of a deed in lieu, however, is that you will avoid the expenses involved in foreclosure proceedings, and your credit rating will not have the blemish that a foreclosure creates.

However, as I have indicated, lenders do not often want to own your house. If you are unable to sell the house quickly, what better opportunities will the lender have?

You should discuss the deed in lieu with your lender, since they will have certain guidelines under which they can or cannot accept the deed.

The final option--to be used only as a last resort--is for you to file bankruptcy. When a person files for bankruptcy, there are many protections that automatically apply from the day the bankruptcy petition is filed with the Bankruptcy Court.

The most important protection under the bankruptcy law is what is known as “the automatic stay.” If you are in the Bankruptcy Court, no legal action can be taken against your house unless the lender asks the court for permission to “lift the stay.”

This means that the lender goes to the bankruptcy judge, in open hearing, and petitions the court to permit the foreclosure to take place. Depending on the circumstances, including the amount of equity you have in your house and the possibility of getting back on your feet financially, the Bankruptcy Court may or may not lift the stay.

The process for petitioning for a lift of stay can take some time, since the bankruptcy courts are currently very much overworked.

The Supreme Court of the United States just handed down two important opinions giving greater protection to individuals who are seeking the protections of the bankruptcy court. It is now clear that the so-called Chapter 11 bankruptcy proceeding is now available to individuals as well as to businesses.

A Chapter 11 proceeding permits an individual to attempt to restructure his or her financial life by submitting a reorganization plan with the bankruptcy court. If the plan is approved, the individual will have a few years in which to try to work out all of the financial obligations, and in the interim, the debtor’s house cannot be foreclosed upon.

These are very difficult and troubling times. If you find yourself in financial trouble, you must take immediate steps to try to work out your difficulties. You must talk with your lender, and with your financial advisers. You cannot ignore these problems, or you may find yourself without a home.