I Cannot Afford My House, Now What?

If you were like many in the past five years or so you probably jumped on the “investment” bandwagon and now find yourself with a piece of property, or two or three or four that you cannot pay for. Many of my clients find themselves in this situation and confess that they are simply overwhelmed and confused. If you find yourself in the same situation, here are some options that may be available to you: a short sale; a foreclosure; a deed in lieu; loan modification or a bankruptcy.

Short Sale: You have probably heard a lot about the phenomena known as the “short sale.” Basically this is a sale of real property in which the proceeds from the sale are less than the balance of the mortgage and the bank accepts this amount as payment in full of the loan. Some believe this is the answer to all your real estate woes but there are some things you need to be aware of. First, the bank must agree to the short sale price, which is does not have to do. Second, you must find a patient buyer willing to participate in a short sale.

Third, it takes on average 3-5 months to complete a short sale, which is why it is sometimes difficult to find a buyer. Fourth, you could receive a 1099 for the difference between the sales price and the amount you owed on the loan. If you receive a 1099 for the “deficiency” then you will have to pay taxes on that income. It is not a guarantee that the bank will issue you a 1099; however, it is a risk.

Foreclosure: A foreclosure is often viewed as the worst thing that could possibly happen. However, as I often tell my clients, depending on your circumstances, it may be a great solution. In Arizona there are two basic types of foreclosure, a judicial foreclosure or a trustee’s sale. Most banks are utilizing the trustee’s sale so I will focus on that. Once you are behind on your monthly payments, usually at least 90 days, the bank may decide to foreclose.

This is where the bank starts the process of taking the property away from you in order to try to sell it. You will first receive letters and phone calls and eventually you will receive a Notice of Foreclosure. There are several hoops that the bank must go through to successfully complete a foreclosure. One hoop is that it must record a Notice of Trustee’s Sale that gives the world notice of when and where the sale will take place. The Notice must be recorded at least 90 days prior to the sale or the sale will be invalid.

If the property is purchased at the trustee’s sale it will likely be purchased for an amount less than what you owed on the property. The difference between the amount owed and the sales price is called a “deficiency.” The banks used to be able to sue you for that deficiency, and some states still allow that. However, if the property is in Arizona, it is residential (meaning someone is living on the property) and it is on less than 2.5 acres, then the bank cannot sue you for the deficiency.

However, it can give you a 1099. If your property is not residential, is a vacant lot or is more than 2.5 acres, you can bet the bank will sue you for the deficiency. Although this will be on your credit report, it may give you the financial freedom you need.

Deed in Lieu: Another option you may have heard of is a “deed in lieu.” This is a simple process where you simply sign a deed giving the property back to the bank. This is very seldom used by the banks today; however, it is always worth a try.

Loan Modification: Applying for a loan modification is a popular option right now, especially since the Federal Government has created programs to help consumers. A loan modification is an agreement between you and the bank to change the terms of the original loan. This can be a change as simple as adding the arrears onto the amount of the loan and starting the payments again. Or, it can be as beneficial as lowering the interest rate, changing a variable rate to a fixed rate, extending the life of the loan or lowering the monthly payment for a time period.

In a very few extraordinary circumstances you may be able to lower the amount of the loan, but I would not hold your breath for this one. Keep in mind that most banks will not even talk to you about a loan modification until you are at least 90 days delinquent. By that time your credit has taken a hit and you have little leverage.

A word of caution; be wary of “loan modification” and “debt consolidation” companies. My clients have often told me that they tried this, paid too much money for it, and did not obtain a favorable result. If you are interested in hiring another to help with your loan modification or debt consolidation, I highly recommend you research the company on the internet, with friends and with the Arizona Corporation Commission or Secretary of State.

Oftentimes they cannot do anymore than what you can. Some find that it is worth the money to hire someone else to take on the burden of the negotiation. To start the process usually all you need to do is call the bank that holds the mortgage and ask for a loan modification packet. You will need to fill it out, and often provide pay stubs, a monthly expense worksheet and bank statements.

Bankruptcy: Filing for bankruptcy may be the best option for you in that it can help you save the property, discharge your debts, and give you a fresh start. If you qualify for a bankruptcy there are several things that can be done. First, you can surrender the property back to the bank and walk away. The bank cannot sue you for any deficiency and it cannot give you a 1099. You can take advantage of the bankruptcy process and stay in the property, payment free, for approximately 60 days after you file the petition and then surrender it. You can stop a foreclosure, keep the property, and pay the arrears over a period of 12 months or more. Or, you can use the bankruptcy as leverage to get the bank to modify the loan and keep the property.

Remember, filing for bankruptcy can also result in discharging numerous debts and starting you down a road of financial freedom.
In conclusion, all of these will affect your credit in some way. But, if you are even at the point that you are realistically considering one of these options, your credit has probably already taken a significant hit and now you need to stop the bleeding and create a new future.

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monica k. lindstrom
Monica K. Lindstrom
Monica has had a diverse and successful legal career, which has led her to focus her practice on mediation. She has made the shift from zealously advocating for her clients to compassionately helping others resolve their disputes.

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