Good Foreclosure Defenses
Kentucky Foreclosure Defenses – The homeowner is required to file an answer within 20 days after being served with foreclosure or a default judgment may be entered and the property may be sold within 90 days. If the homeowner files an answer, discovery and perhaps a bankruptcy, the homeowner may win the lawsuit, have the lawsuit dismissed, or the foreclosure process may take years. In the months or years it takes to foreclose a homeowner often makes no insurance, property, tax or mortgage payments eventually filing a Chapter 7 or Chapter 13 bankruptcy so there are no deficiency or tax problems. You can build up savings that enable you to find other housing. A new mortgage at a normal interest rate is often possible 3 years after the sale. If you fail to defend the foreclosure and file a Chapter 7 the mortgage company may collect the deficiency and the mortgage company will file a 1099-c causing an income tax problem. Charging off the debt creates an income to the Debtor and a tax credit for the lender.
Chapter 13 Bankruptcy – is the primary tool that allows a homeowner to keep a home. A homeowner may take up to 5 years to catch up the mortgage and may be able to strip (eliminate) a second home mortgage if there is no equity for the second mortgage. Improper charges to the loan can be challenged by motions to deny the mortgage companies claims and lawsuits may be brought against the mortgage company or servicer.
Chapter 7 Bankruptcy – A Chapter 7 bankruptcy is a good option if you wish to surrender the home or if you are close to current on your mortgage and wish to keep the home. Chapter 7 may make the home affordable by eliminating other debts. Chapter 7 will temporarily delay a foreclosure and eliminate the tax and deficiency liability if it is properly filed prior to the sale. In a Chapter 7 you rarely lose property and wipe out unsecured debts that may be causing the problems with paying the mortgage. You can keep a substantial amount of equity in your home and other property. In Kentucky you can have more than $23,000 in equity for a single person or $46,000 for a couple that are on the deed. Even if a home eventually forecloses a bankruptcy trustee may be much better than a foreclosure in state court where you keep far less equity from the sale. In a bankruptcy sale the proceeds:
- go to the taxes and mortgages first
- then to the Debtor
- then to any non-dischargeable debts such as Child Support and income taxes
- and finally to unsecured creditors and judgment liens.
In a state sale the proceeds goes to judgment liens before the debtor is paid. The debtor only keeps $5,000 in equity not the $23,000 exemption. And the Debtor, his income tax and Child Support are paid last if anything is left.
Bad Foreclosure Defenses:
The Foreclosure defenses that do not work so well are:
Reinstatement/Workout – These options take months and you may not have the time and often it increases the legal fees the bank adds. Sometimes they promise a workout but continue to foreclose. Each month that you fall further behind increases costs and fees. If the home is a bargain and worth what is owed at a reasonable rate it may be worth saving by obtaining a Reinstatement of the mortgage if you have the money and can afford catching up the payments in a short period of time. In a workout you work with a Counselor to get a:
- Forbearance – relief from making monthly payments for a period of time but at a cost to equity.
- Repayment or Reinstatement – plans to make up missed payments.
- Interest rate reduction.
- Reduction in loan balance (very rare) often only offered after litigation.
- If the bank refuses reinstatement or workout a 13 can force payments on the bank
Mortgage Modifications – Most programs end Dec 2012 over 90 percent of all mortgage modification applications fail. Banks often will agree to a temporary rate reduction but at a long term increase in the interest or amount paid back. Workouts eliminate the past due payments but places that amount back into the principle increasing the term. Governmental programs haven’t been successful and the new program HARP has had the same failures that HAMP had. (888.995.HOPE)
Short Sales – You work with the lender to sell the property for less than the loan is worth. Very little benefit to you from this option over foreclosure. You may still owe a deficiency and it triggers an income tax debt from a 1099-C for the defficency after doing the work. You do all the work of selling your home for the bank so you can lose possession of the home early. Finally you are liable to lawsuits from the purchaser for property defects.
Deed in Lieu of foreclosure or Short Sale – You give the property to the lender prematurely. This has a very small benefit to you on the credit rating just like a short sale and often still leaves you with a deficiency and/or tax problems.
Just walking away still leaves the homeowner liable for income taxes and the deficiency. If the property is condemned there may be fines and other penalties.