California has the third highest foreclosure rate in the nation, with over 250,000 people in that situation, many of them hoping to stop foreclosure before they lose their property. However, both state and federal laws provide alternatives. As a title theory state, a lender holds a deed of trust or mortgage in trust until the entire amount is paid in full. If the borrower defaults, however, most mortgages contain a power of sale clause, which allows the lender to sell the property to regain their money through non-judicial means. If this process is pursued, the lender cannot sue for any deficiency, or difference, between the sale amount and the amount owed. If there is no power of sale agreement, the lender must pursue judicial foreclosure, and they then have the right to sue for deficiency.
A foreclosure generally takes 120 days, although a contested or judicial foreclosure may take longer. During that period, the homeowner may consult a counselor from the U.S. Department of Housing and Urban Development (HUD) and a skilled foreclosure lawyer to learn what alternatives to foreclosure are open to them.
Home Sale to Prevent Foreclosure
For most people, the worst consequence of today’s financial crises is the loss of their home. If they have been unable to find any means of preventing that result, they may be able to realize some income by a pre-foreclosure sale. If they sell the property for more than they owe, they may be able to get back on their feet financially. However, if they fail to receive that kind of offer, they may have to choose another option:
- Some lenders will agree to accept whatever amount the debtor receives from the sale of their home to pay off their mortgage. This is called a short sale and saves the lender from the costs of foreclosure. It is crucial to get this agreement in writing, however, to ensure that the lender will not sue for deficiency when they receive less than the amount owed, although California only allows such judgments in certain situations.
- Some lenders may also be willing to accept the debtor’s property deed in lieu of foreclosure. Again, this is an agreement that must be put in writing to protect the debtor from facing a deficiency judgment for the balance. In many cases, with the help of a skilled counselor from the U.S. Department of Housing and Urban Development and a committed attorney, the transaction may not damage the debtor’s credit rating.
Filing for Bankruptcy
For some people facing foreclosure, bankruptcy may provide the help they need to save their home. While it does damage one’s credit rating for many years to come, it does often provide some relief and some breathing room to reorganize and begin to rebuild their financial status.
- Regardless of whether a debtor chooses chapter 13 or chapter 7 bankruptcy, the court orders an automatic stay, or hold, on all collection and foreclosure processes. Creditors may request that that stay be lifted, but even such a request takes time, allowing the debtor some breathing room to seek the correct alternative.
- Those who file for chapter 7 bankruptcy may have to liquidate some of their property, although California has a high homestead exemption of between $50,000 and $150,000, depending on the filer’s circumstances. In addition, most consumer debts may be discharged, or erased, leaving a greater portion of their income to direct towards the remaining mortgage payments.
- Chapter 13 provides a more secure option for many filers, because they do not have to liquidate any personal property. Instead, with the help of the bankruptcy trustee and their lawyer, the filer reorganizes their finances and formulates a plan to repay their bills, often at a lower rate, for a specified period of time. If the homeowner meets those deadlines for the life of the agreement, they should be able to keep their home.
Federal Government Assistance
Before those more difficult options, homeowners should investigate the government programs to help troubled mortgage holders. Each has specific qualifications that the borrower must meet, but knowledgeable HUD counselors can help the borrower determine which is best.
- Those with adjustable rate mortgages or high interest loans may find help in the HOPE for Homeowners Act. It helps qualified borrowers negotiate from variable rate to fixed rate, 30-year loans with FHA backing.
- Homeowners with high interest rates and high monthly payments may find refinancing assistance through the Homeowner Affordability and Stability Plan.
- In the past, homeowners who have been forgiven part of their debts have found that the IRS taxes that amount as “income.” However, the Mortgage Forgiveness Debt Relief Act of 2007 now prohibits the IRS from doing so.
Working with Lenders
Often the best option is for a homeowner to begin communicating with their lender when they first begin to face financial problems. They have programs in place to work with troubled mortgage holders who they believe are willing to work hard to save their homes. Many of these programs are available through the lender’s loss mitigation department:
- Some lenders may agree to forbearance, allowing borrowers to miss a few payments or make reduced payments for a specified period of time.
- If a borrower knows they are coming into some money, they may be able to discuss reinstatement of their loan with their lender. The homeowner agrees to make up any missed or reduced payments and bring the loan current by an agreed upon date.
- In order to avoid the costs of foreclosure, a lender may be willing to modify the loan, sometimes lowering the interest rate or extending the loan to reduce payments.
Getting Legal Help Stopping Foreclosure in California
California is a homeowner-friendly state, providing a number of plans or processes to help citizens keep their homes and return to financial stability. However, some of these are complex programs with specific requirements that a homeowner may not be aware of. With the right legal advice and financial counseling, many can find a plan to help them stop foreclosure on the family home.
