CAN HOME FORECLOSURE BE PREVENTED?

When you get behind on your house payments, your creditor, perhaps a mortgage company, savings and loan, bank credit union or even an individual, may foreclose on your property. The number of months you are behind may vary, but at some point in time, the mortgage holder may refuse monthly payments unless you pay all of the arrearage. If you cannot, the mortgage holder will have a Notice of Default recorded at the County Recorders and a copy mailed to you. This will state on it the amount of the arrears plus added late fees and foreclosure charges to a date on or before the recording date of the notice. The mortgage holder then must wait 3 months before they can do anything further to foreclose.

When the 3 months have run, the mortgage holder can then post, publish, record and mail to you a Notice of Trustee's Sale, which will set the total estimated mortgage debt on their mortgage, which will be bid by them at a foreclosure sale. The date set for the sale must be at least 21 days after recording of the sale notice. The law says you have up to 5 business days before the sale to cure the arrearage. After that, the mortgage holder can demand the total amount owed, not just the arrearage, to stop the sale.

At foreclosure, the property is sold to the highest bidder, usually the mortgage holder itself. If your mortgage is guaranteed, such as a VA or FHA loan, the mortgage holder will be paid off by the guarantor.

On loans guaranteed by the VA or FHA, the guarantor will then sell the home and apply the proceeds against the costs of foreclosure, fix-up, resale and the balance of your mortgage. If the proceeds of the sale are equal to or more than that amount, you will have no further liability. If the proceeds of this sale are less than this amount, which is usually the case, there is a resulting deficiency balance owed to the VA or FHA. You are obligated to pay this deficiency. Like any other debt, the VA or FHA can pursue whatever collection action it deems appropriate under the law.

If the deficiency is forgiven by the VA or FHA - that is, the creditor elects not to pursue collection of the debt - this may result in taxable "income" to you for IRS tax purposes.

On loans you obtained to buy your home, if not a VA or FHA loan, California law does not allow the mortgage holder to pursue you for a deficiency. However, where you have a mortgage that was not obtained to purchase your home, the mortgagee can do what is called a judicial foreclosure that will allow them to pursue a deficiency.

Further, if a mortgage is foreclosed, it wipes out the lien of any later mortgage on the home and that mortgage, if not obtained for purchase of the home, can still sue you for the debt.

To make matters worse, the IRS will consider the foreclosure a sale for tax purposes, with the sale price being the total foreclosure bid plus any senior mortgage amounts, if any, assumed by the bidder. Your "profit" for tax purposes would be the difference between your original purchase price and that so-called sales price. Many times people will not only lose their home and get no money, but still be then with a tax bill for many thousands of dollars.

The filing of a Chapter 7 or straight bankruptcy prior to an actual foreclosure sale of the home will remove your personal liability on this mortgage debt so that you will have no further obligation to pay if the home is ultimately foreclosed. It will also provide possible options to avoid tax liabilities. A Chapter 7 also will stop, at least temporarily, the foreclosure process. This may allow you the time to possibly sell your home, refinance, bring your mortgage current, or at worst, give you more time to arrange for somewhere to live. The creditor cannot proceed with a foreclosure until you are discharged (usually about 4 months) or until they obtain permission from the court to proceed. Typically, that takes 1-1/2 to 3 months.

Debt reorganization under Chapter 13 may give you the opportunity to stop the foreclosure, keep your home and pay the arrearage and other debts over a reasonable period of time while continuing to make future mortgage payments. In Chapter 13 mortgage arrearage may be cured within 5 years. Even balloon payments which have come due can be paid this way.

If your mortgage payments are behind, you should immediately determine your bankruptcy options. Quick action can possibly avoid the foreclosure altogether and avoid expensive additional costs and fees.