In the course of any foreclosure prevention action, homeowners typically are afforded two options; foreclosure loss mitigation through their lender or bankruptcy through the courts. The ability of a homeowner to take advantage of either option is decided on a case-by-case basis, as well as the determination on whether each option even will benefit a homeowner.
Benefits and Detriments of Loss Mitigation
Through their lender, homeowners may be able to garner favorable loss mitigation workouts. Wide varieties of workouts are offered by lenders, which include options to keep a homeowner in their home and current mortgage and in other cases, remove a homeowner from their home, but pay off a large amount of the outstanding mortgage obligations.
Depending on the specific desires of a homeowner, as well as the overall nature of their total debt obligations owed on a given home, the following aspects of loss mitigation may prove beneficial:
- Provide temporary or permanent relief to overwhelming mortgage obligations, through forbearance, modification, partial claim, or refinancing
- Provide a final solution to an unmanageable mortgage through short sale or deed in lieu, which allows a homeowner typically to erase outstanding mortgage debts, albeit at the cost of losing their residence
The inherent problem with any loss mitigation action taken by a homeowner is their overall debt to income ratio. In cases of workouts keeping a homeowner in their current mortgage and home, if sufficient income is not generated in light of debts, homeowners will once again foreclosure down the line. In other cases, loss mitigation workouts involving homes in exchange for debt cancellation may not provide debt relief for homeowners with other debt obligations, including second mortgages or in the case of deficiency liens. In essence, dealing with the mortgage debts only solves part of a homeowner’s overall debt issues.
Benefits and Detriments of Bankruptcy
Many foreclosure cases involve an overall debt issue that homeowners are juggling as best they can. However, the inevitable problem is that their income cannot meet current debt obligations, and given that a mortgage is often a large portion of one’s monthly debt obligations, a homeowner typically faces default and foreclosure action from their lender. Contrary to the suggestions of a lender, bankruptcy through bankruptcy courts is another loss mitigation method that a homeowner could employ to their advantage.
Filing bankruptcy, either Chapter 13 or Chapter 7, will place an automatic stay on all creditor collection attempts, and effectively, but temporarily, stop the foreclosure process. In turn, homeowners may be able reorganize or discharge mortgage debts under Chapter 13 or Chapter 7, respectively, and if sufficient homestead exemptions exist or repayments plans are negotiated, a homeowner may be able to remain in their home.
The inherent problems with bankruptcy for homeowners seeking to prevent foreclosure include the following:
- Bankruptcy, under Chapter 7, involves liquidation of all assets, including a home. While certain states do provide favorable homestead exemptions, most do not and homeowners are likely to lose their homes.
- Bankruptcy, under Chapter 13, only provides for reorganization of debt under the supervision of a bankruptcy trustee. If a homeowner fails to meet obligations under Chapter 13, they still may lose their home.
- Many homeowners wish to avoid foreclosure due to the affects the process will have on their credit report. Bankruptcy declarations on credit reports are just as bad, if not worse.
- Not all persons will be eligible for bankruptcy protection and are subject to a means test
Getting Legal Help with Foreclosure
In most cases, homeowners need perspective from an informed attorney regarding their overall debt issues, which most likely involve impending foreclosure. By gaining information the homeowners about their current situation, an attorney can provide the best decisions and courses of action a homeowner should take, which ultimately seek to mitigate the losses a homeowner will suffer if potential future risks are realized.
