Alternatives To Foreclosure

June 29, 2009 by Julio
Filed under Foreclosure

There are several alternatives to foreclosure that you could consider, but before you consider them you have to know about them. For many people, a foreclosure seems like the end of the world, and the possibly of even the end of a lifetime of hard work, so it should be avoided at all costs. In order to avoid one, you have to a good understanding of what the term ‘foreclosure’ entails, and how you got into this situation.

Let’s look at the last question first, and why it is an important one to answer before considering your options. People get into difficulties with debts such as credit cards, loans and mortgages for a number of reasons, the most common being unexpected changes to their ability to pay. Examples of that are redundancy and job loss for other reasons, wage reductions and additional commitments. None of these their fault.

None of these are uncommon in today’s financial climate, and not only are businesses closing down every day, with consequent loss of jobs, but others are reluctantly accepting lower pay while others are borrowing increasing amounts of money to make ends meet - with the obvious ultimate results. The outcome is that an increasing number of people are experiencing difficulties in meeting their mortgage repayments, and their homes are consequently at risk of foreclosure.

What is Foreclosure

Foreclosure is where mortgage lenders, such as banks and building societies, request the courts for foreclosure of your ‘equitable right of redemption’, meaning your right to repay the loan in full after missing one or more payments. Once this has been granted, your legal rights to your home are over and the lender can sell it to raise the cash to repay the mortgage loan.

The proceeds go first to the mortgage lender then to any other lien, or secured loan. You get what is left. This can be a severe blow to you, particularly if you have been paying for several years, and then find yourself missing a payment through no fault of your own. You could owe very little on your home, yet still face foreclosure. The equity would be of little use to you since you would be unable to purchase a similar home for the same money.

What you must to avoid this is to be proactive, and inform your lender of your difficulty. However, this has to be done very carefully because that could prompt them to foreclose on your first missed payment, so speak to a professional mortgage or loan advisor before doing so. Your options are:

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1. Loan Modification

A loan modification is an agreement between you and the lender to change the terms of your loan. Although foreclosures are becoming more common, the conditions which led to your financial difficulty are generating an increasing number of defaulters, and lenders are becoming more amenable to rearranging the terms of your loan.

To be successful, you will have to apply using the proper loan modification form, and understand the right way to speak to your lender. If you learn the correct way to conduct your application then you will have an excellent chance of success, since the very conditions that has led to the situation has also bred a willingness on the behalf of the lenders to come to an agreement.

The modification can save you a lot of money on monthly repayments, and can include such restructuring as an agreed reduction in your capital, a reduction in your interest rate or an increase in the length of time you have to repay. Each one of these will result in a lower repayment rate, and enable you more likely to be able to meet your monthly commitment.

Make sure that you take the advice of professionals in the correct application procedure for a loan modification because this can save you many thousands of dollars, not to mention your home.

2. Bankruptcy

Filing for bankruptcy might seem an extreme solution, but it can be done and you still keep your home. The Bankruptcy Code contains two Chapters relating to individuals, each of which can be used to your advantage. The first is Chapter 7, and used when you have no equity on your home. In effect, you are declared completely bankrupt and in liquidation.

However, because you have no equity on your home, there is little point in the lender repossessing it if you can keep up with your repayments. The advantage comes when you have a number of other debts, such as credit card debts, and if your utility services have been disconnected. By becoming bankrupt you can keep your house, as long as you meet the repayments, but your other debts, with a few exceptions, will be written off.

These exceptions include up to 3 years of unpaid income tax, student loans, and some others, but you get your credit card debts cleared and your utilities restored. If you have equity on your home, however, you lose it. It will be repossessed and sold, the proceeds paying your mortgage and secured debts, and the rest shared between your other creditors. In this case you should file under Chapter 13.

Chapter 13 promotes rearrangements of your loans to enable you pay them more easily. Loan modifications can be used to make a massive difference to the amount you have to pay, as explained above, and you can save your home as long as you meet the revised repayments.

As you can see, then, there are alternatives to foreclosure, but you have to know how to get them, and that is where you require a mortgage loan specialist to help you.