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Short Sale vs. Fore-closure

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Should You Short Sale or File Foreclosure

Your mortgage is about default due to slow payments. The question comes up as to what makes better financial sense; a short sale or fore-closure on the property. If

you have the ability and the lender and all the other lien holders agree, a short sale (paying less than one owes to the lien holders) might make more sense. If the lenders do not agree, foreclosure may be inevitable and your only choice. Both, the short sale and the fore-closure will have a negative impact on your credit scores.

Getting Short Sale Approval

Another requirement is that one MUST have the approval of the lien holders legal department and you MUST show good reason for the request to short sale the loan. Legitimate, valid reasons include disastrous medical issues (death of the primary borrower) that have caused the deficiency, mass lay-offs in a given geographical area and extreme unusual circumstances way outside the norm (i.e.: weather that has devastated the entire area, earthquakes that have completely destroyed the area where the property is located).

Just because one of these circumstances has occurred does not excuse, negate or hold harmless the borrower from the debt. The fact is the lender provided funds for the PURCHASE of the home… not the home itself. This is one reason many insurers are suggesting flood insurance for most properties. If one looks at the devestation caused by the flooding in the mid-west in recent years, one can quickly see why flood insurance is now more the norm as opposed to the exception. 

With the involvement of FEMA, many homeowners have been provided short term loans regardless of credit to be made whole, in a sense, so they do not fall behind on their loans and for many, they have been able to re-build, sell or relocate without the negative impact on credit or the devestating effects the occurrence caused in the first place. Most lenders will readily accept these payments, even if they had to wait for the payments from FEMA, rather than re-victimize an otherwise solid borrower who, through no fault of his own, found himself in these unfortunate circumstances.

Another financial vehicle that has become very popular is medical savings accounts. People who have these accounts are already prepared to make payments on what could be very expensive treatment and some insurance policies provide very large face amounts to reduce the potential financial ruin due to catastrophic illnesses.

Foclosure

Financial irresponsibility, poor decision making, failure to replace income due to firing are all examples of why a lender would refuse a short sale. I saw a sign recently that read “Poor planning on your part does not constitute an emergency on my part”. In this context, that means, if one makes the ill-advised decision to engage in activities that entail a huge amount of financial risk and loses his money or one engages in illegal activities NO lender will approve a short sale.

An example of an illegal activity would be any activity that violates the RICO Act. For quite some time, the safest haven to hide ill gotten gains was in real estate because it was very difficult for law enforcement to seize a property. RICO changed all that. If it is found out that ill gotten gains were used to purchase and as a result “hide” these monies vis a vis the real estate owned, the lender will not grant approval to the short sale and under the RICO Act will immediately institute foreclosure proceedings.

After the fore-closure is completed and in conjunction with  law enforcement, the property becomes the property of the government. The house and the contents, at this point become the property of the government and are subject to auction or sale.

Consult With An Attorney Before Foreclosure

Please note: ONE MUST CONSULT WITH AN ATTORNEY TO FILE THE PAPERWORK FOR APPROVAL OF A SHORT SALE. My recommendation also is that if  fore-closure is inevitable, consulting with an attorney is highly recommended. If you have read my previous articles, the reasons are clear.

If a short sale is granted, one will also need to understand that it will be very difficult to obtain a loan for at least three years under FNMA or FHA guidelines. One needs to consult with the lenders to find what all of their guidelines are in qualifying for a new loan.

 Some lenders do not have every program available. In other words mortgage company A may not have the programs that mortgage company B does. It will require some checking and some phone calls/emails to find out. I cannot stress the importance of the borrower performing his due diligence in looking into qualifying for a loan after a fore-closure or a short sale.

How to Avoid Filing Bankruptcy – My Personal Story

Avoid Filing Bankruptcy

With all of the information you have read here about mortgages and bankruprcy, a wise question to ask is how to avoid filing bankruptcy in the first place. In this day and age of economic uncertainty, declining property values, high unemployment, declining wages and an increase in the costs of goods and services, it is difficult for many people to avoid borrowing more, stretching out payments for a longer period of time, borrowing from their savings or worse, mortgaging their childrens’ futures just to stay afloat.

My Story Avoiding Of Bankruptcy

As a parent, I know that in the middle of the last decade, my wife and I at times had to make these difficult choices. Fortunately, the amounts we had to borrow from our savings were not so high that we wound up finally declaring bankruptcy, but we did come close. I remind the reader that I was in the mortgage business for well over 15 years and was in the trenches, so to speak, on a daily basis and my income was reduced because of the mortgage crisis.

Avoiding Bankruptcy Starts At Home

The very first thing we did to avoid bankruptcy was reduce unnecessary expenditures. That meant taking day trips to the mountains or the shore as part of our vacation time instead of being away for a week or two at a time. We had to reduce the number of vehicles from two to one to reduce the amount of gas we used, vehicle insurance and maintenance and our children had to make do with a little less.

Another thing we did was not take out new credit or any new loans, we paid off credit cards and started taking care of and maintaining the houses we owned ourselves. I am in no way a handy man, but basic things like lawn maintenance, any electrical repairs I did myself. We even replaced our carpeting ourselves because our daughter is highly allergic to carpeting glues. Another way to reduce these expenditures is to limit shopping excursions as much as possible.

When Bankruptcy is Unavoidable

Assuming one has done some of the things I just outlined and bankruptcy is now unavoidable, how can the process be made as smooth as possible? First of all, pay off as much as possible before filing. Please note that the courts will want to see a list of all debts and credits on a balance sheet.

There have been instances of people going to court to file either without this list or have conveniently hidden monies. These monies are typically not reported to the IRS, are assets that are hidden in other relatives accounts, have been moved to minor childrens accounts,etc. This is not only un-ethical but illegal.

If the amounts are high enough, one could be prosecuted for fraud under the RICO Act. So, a complete listing of all assets and debts is required. Be prepared with bank statements, stocks, bonds, etc. A bankruptcy attorney will give you a list of all that is required. Lawyers will charge you over $500 if you are short on cash you may want to get a bankruptcy software, which is low cost bankruptcy assistance program (costs less than $50).

Be advised that creditors have a right to dispute one’s ability to pay the debts, the amount owed and any communications you have had with the creditor in regard to their attempt to collect the debt. One major pitfall is any attempt on the part of a creditor to collect on a deceased parents’ debt. As strange as this sounds, it does happen. When my step-father passed away in 1994, the hospital called me on several occasions to collect on his unpaid hospital bill. I was never listed as the responsible party for his debts, yet they listed his debts on my credit report. It took many calls to their attorneys from my attorneys as well as cease and desist notices sent to the hospital to stop contacting me.

Which Regulations Protects You

Under the current FDCPA regulations, I could have filed a lawsuit against the hospital. Another pitfall one can encounter in filing, is for one not retaining correspondences between yourself and the creditor.

Strange as this may sound, creditors do NOT always have accurate information. This is because their accounting departments are split between loans in default, loans in good standing, collection departments, servicing,legal etc. and it does happen that these departments do not always “talk” to each other. Keep all correspondences you receive and any canceled checks you may have.

You may have to contact your bank for statements showing these payments. You should insist on correspondences in writing. Telephone calls can become heated, recollection of these calls can be sketchy and since there is frequently a lot of emotion involved, exact recall may be difficult. If all this seems way over your head, or you think it should be done professionally, you are right. A bankruptcy software is a low cost alternative assistance when filing bankruptcy.

Now that bankruptcy is a certainty, it is imperative that all parties resolve these issues sans heated emotions. Accurate record keeping is critical as is full disclosure on the part of the borrower.

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Read These Post On Bankruptcies:

1. Do You Know All Your Alternatives To Bankruptcy
2. Can You Refinance After Bankruptcy?
3. Where Can I Find Sub-prime Loans Today??
4. Get Your 80/20 Mortgage Loan Approved in 2012

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