Martin M. Holmes
Options for Homeowners Facing Foreclosure
Homeowners have several options regarding the pending foreclosure of their home:
1ST - DO NOTHING
The sheriff will hold an auction sale at the date and time and place set in the foreclosure notice. Anyone may show up and bid. All bids are cash (except for the montage holder who can submit a credit bid). The sheriff will deed title to your property to the successful bidder and the funds received will be applied to your mortgage note. In the event more is received than you owe the remaining funds belong to you. If the amount of the bid is not enough to retire the entire amount you owe. Then you remain personally obligated for the deficiency balance. You won’t know the potential deficiency liability until after the sheriff’s sale is held and the sheriff’s deed recorded. The sheriff’s deed recites the amount of the bid. Although legal title passes to the successful bidder on the date of the sheriff’s sale two important rights remain with the homeowner for a period of 6 months.
- the right to redeem. That is you can force the successful bidder to convey the property to you by paying them to cash in the amount that they paid plus interest and out of pocket expenses. You can, therefore, attempt to sell the property during the 6 month redemption period and use the proceeds to redeem the property.
- During the six month redemption period, you have a right to retain possession of the property. Thus, you can continue to live in the property without paying any money to the bank. You should keep the property insured for your own protection. You can also sell the right to redeem to another or sell the right to possess the property to another, i.e. rent the property and keep the rent. At the end of the 6 month period if you have not redeemed the property then you or those claiming under you must vacate the property. The 6 month redemption period is shortened to 30 days if the property is abandoned.
2ND - SHORT SALE
In a nutshell, the owner sells the home. In order to complete a sale, the owner must convey title to the buyer. One cannot convey clear title as long as the mortgage holder maintains its lien on the property. Often times a mortgage holder will agree to release the lien upon payment to them of less than the full amount owed. If they do that the owner can convey title and consummate a sale. Typically the mortgage holder will demand the full amount of the net sale proceeds. The term is called a "short sale" because the lien is released on the sale with payment to the lender" short of the full amount owed. What happens with the remainder of the debt is subject to negotiation. Sometimes the mortgage holder will agree to release or forgive the remainder. They will typically provide you and the IRS with a 1099 for the debt forgiven. The IRS will then consider that amount as taxable income to you. Other times the mortgage holder will demand the owner to agree to repay the remainder of the debt as an unsecured debt or to repay the remainder of the debt and provide substitute collateral. The short sale option is available until the end of the redemption period. If the property is foreclosed.
3RD - YOU CAN ATTEMPT TO GET A LOAN MODIFICATION FROM THE LENDER
There are a number of programs to assist with that. You can find out more at https://www.makinghomeaffordable.gov/pages/default.aspx. Michigan also has a separate assistance program known as Stepforward Michigan. Under the Stepforward program, The State of Michigan Housing Development Authority will pay the lender your arrearages, thus preventing foreclosure. You execute a note and 2nd mortgage to MSHDA for the amount advanced. The note is interest-free, payment-free, and is forgiven 20% per year for each year you remain in the home. Information can be found at https://www.stepforwardmichigan.org. MSHDA also provides free housing counselors to assist homeowners in working with the lenders on modifications and the Stepforward process. As I understand it you may utilize both one of the modification programs and Stepforward. You can find out more about these programs at https://www.stepforwardmichigan.org/. I have attached contact information for the local MSHDA counselors. The one big drawback here is that I do not think you have sufficient time to go through the modification and/or Stepforward process before the sheriff’s sale date. The loan modifications and Stepforward are available for property that you are using as your residence, not for investment or rental properties.
4TH - BANKRUPTCY
Filing a bankruptcy either a Chapter 7 or a Chapter 13 at any time prior to the sheriff's sale will stop the sheriff's sale because the bankruptcy code provides for an "Automatic Stay" which prohibits creditors including the mortgage company from taking any action against you or your property. If you file chapter 7. I anticipate the lender would ask the court to lift the stay and allow them to proceed to foreclose. That would probably be granted but the worst-case scenario is that it would buy you an additional couple months of time before a sheriff's sale. Chapter 13 is a repayment plan. You can propose a plan that would keep the current mortgage payments and cure the arrearages over a reasonable period of time say 3-4 years. In that event, the lender would probably not seek or get a lift of stay if the plan was confirmed by the court and payments made. Pursuing Bankruptcy is not mutually exclusive to the other options. You can do both. Filing a bankruptcy often buys one the time to pursue the modifications and Stepforward. A chapter 7 would discharge any personal liability you would have on a deficiency. You can start with Chapter 13 and if you cannot come up with a plan the court approves or cannot make the payments called for in the plan you can convert the case to chapter 7.