Are you facing imminent foreclosure on your home? Has the bank sent you letters and called, and is still moving forward with the process? There is one guaranteed strategy that always works. I have a few other last-ditch efforts that sometimes works. Let’s talk about what you can do if you need to stop foreclosure a the last minute.
What will happen in a foreclosure? How is credit affected? Can you stay in the home? This article will answer all these questions. Each of these methods requires a different period of time, and has different benefits and drawbacks.
What is Foreclosure
Foreclosure is a legal term and process that simply means the bank or mortgage company is taking your house, and attempting to sell it to cover the cost of your loan. Because of this you won’t be able to live there anymore. It usually starts with a written notice of default.
This happens when someone doesn’t pay their mortgage for several months in a row. It can also happen if someone breaks other terms of the loan.
Each state has different criteria for the process. But the process is locked in when you signed all those papers when you were buying your house. You probably didn’t read all those pages, but they say exactly what has to happen to trigger foreclosure, and what goes on step by step if you don’t pay.
Keep in mind that the Foreclosure process doesn’t happen overnight. The homeowner needs to miss payments, and then the bank sends letters and tries to call to work something out. However, the company is under no obligation to try to work things out. They can start foreclosure proceedings immediately (according to the papers) if the rules aren’t followed.
How to Stop a Foreclosure
Once a foreclosure begins, it can be difficult to stop. Here are some strategies people use to stop a foreclosure:
- filing for bankruptcy
- doing a loan modification
- selling your home
- deed in lieu of foreclosure
- and reinstating a loan
Each of these is a different process and has different consequences and results. Not all will work in every situation.
I recommend you contact an experienced Real Estate Attorney or even one that specializes in Foreclosure Defense law to learn more.
Filing for Bankruptcy to Stop a Foreclosure
There are 2 kinds of bankruptcy – Chapter 7 & Chapter 13. On a side note, these names come from the chapters of the US. Bankrupcy code. If you are bored and want to read the whole thing, here it is. When you file for either of these, you get an automatic stay of the foreclosure, stopping it temporarily.
Chapter 7 Bankruptcy
The first kind of Bankruptcy, Chapter 7 is for individuals (not businesses) who meet certain income requirements. The process typically takes 3-5 months, however filing for it while you are in Foreclosure can stop that process right in it’s tracks. There are lots of rules about what can and can’t be done. However, this process allows debtors to quickly discharge most debts and get a fresh start. This involves getting rid of your home and other things, walking away and moving forward.
Chapter 13 Bankruptcy
The second kind is Chapter 13. This type of bankruptcy allows debtors to keep their property and catch up on missed mortgage, car, and nondischargeable priority debt payments. It requires monthly payments to be made but you may be able to keep your home and other possessions.
The major differences between the two involve income eligibility. For Chapter 7 you need to meet certain requirements that are found on this PDF. This is federal law. Note that this is a complicated form, and it might be worthwhile to contact a bankruptcy attorney who specializes in Bankruptcy law so you can learn what is best for you.
Keep in mind that you will need to go to court and talk with a judge who will evaluate your situation and set guidelines. You may need to repay part or even all of your debts depending on your situation. Other scenarios allow for the complete discharge of debt.
There is also a kind of bankruptcy where you don’t go to court and that is called a nonjudicial process.
The kinds of debt that will be discharged are unsecured debts like medical bills, unsecured credit cards, overdue utility payments, personal loans, gym contracts, and more. With secured debt, like your mortgage, you may have that discharged as well, but you won’t own the property anymore.
This will also be shown on your credit report – and’ honestly, it’s not great. The bankruptcy will stay on the credit report for between 7-10 years depending on the type and situation. Your credit score will go down, but most of your outstanding debts will go away.
But the bankruptcy process can stop the foreclosure process – it won’t make it go away. But you will get more time, and even can get help working through everything. You can stay in your home, for a little while longer.
These next solutions might work but aren’t guaranteed to stop the process like Bankruptcy.
Using a Loan Modification to Stop a Foreclosure
A loan modification is when you and the mortgage company or bank work together to change the terms of your loan to make it easier for you to repay.
The bank doesn’t need to do this, but they might because:
- They keep getting paid back for their loan
- It is less expensive legally to work something out without involving lawyers and the courts
- There is no delay – where foreclosure can go on for months, a Loan modification can go into effect right away.
Ideally, the moment you realize that you are going to have a problem paying your monthly payment it is worth contacting your mortgage lender to try to work something out. The longer you wait, the less likely they are to help. And remember, they are under no obligation to help at all.
Be careful about dual tracking. The bank might be trying to work with you on a loan modification, but at the same time, they could be still proceeding with the foreclosure process.
If they are dual tracking, it could be illegal in your state and you could sue the bank to stop the process. Again, consult an attorney.
Selling the Home
You can sell the house to repay the outstanding mortgage debt.
Remember that before you get any proceeds from the sale, there are already liens on the home – A title search, but a title company will reveal what they are. But if you have a mortgage, then the bank or mortgage company has a 1st lien already in place, so they get paid before you do.
Also, this process only works if you have positive equity in the home, meaning it is worth more now than when you purchased it.
If you owe more than the house is worth, you are underwater and need a short sale.
Short Sale
A short sale is when you sell the home for less than you paid for it. This needs to be done in conjunction with the lender. They must agree to take less than they put out for the loan.
Banks may do this for the same 3 reasons outlined above in the Loan Modification section. You will also need a real estate agent who specializes in short sales, as they are a little different than a regular one. They can tell you the value of your home so you can make the decision you need.
Deed in Lieu of Foreclosure
This method of stopping a foreclosure at the last minute is a very drastic step. You hand over the title to the house to the bank, and they discharge your debt. It can be a good option if you have somewhere else to live, because you won’t be able to stay in the home past the transfer date.
Piles of Cash and Reinstating the Loan
Depending on how much money you have, you might be able to simply pay back the debt. It could be possible to liquidate other assets to get enough money. You can’t just claim financial hardship and skip out on payments.
Mortgage Forbearance
This is where you work with the bank to temporarily stop or reduce your monthly mortgage payment to give you enough time to build back up your finances. Honestly, this isn’t a last-ditch effort, but something you need to do earlier in the process if possible.
Final Thoughts
Please understand that none of this is legal advice. If you are wondering how to stop foreclosure at the last minute, hopefully, these strategies will work for you. Look over all the choices and choose the best option for you. The best way to stop a foreclosure at the last minute might not be the one you think. The first step is really to contact an attorney or someone independent who can analyze your financial situation, and give a good recommendation.
These last-minute strategies might be able to get you extra time to work something out. Please use this article for general information purposes. Most financial counselors will offer a free consultation with just a simple phone call and possibly help you find a better option.