The Biggest Mistake Homeowners Make When Facing Foreclosure
Richard Fonfrias, J.D.
Chicago’s Financial Rescue & Bankruptcy Lawyer
Fonfrias Law Group, LLC
Homeowners often think that if they face foreclosure, they can simply walk away from their home and their problems disappear.
But this is a huge mistake.
The law allows the lender to file a lawsuit against you – and get a judgment against you – for the amount you owe on your mortgage. As a result, when you total the years of accrued interest, plus the years of missed mortgage payments, you could end up owing your lender a small fortune for the home you are not permitted to live in any longer.
Here’s what most homeowners don’t understand:
The purpose of a foreclosure is so the lender can seize your home and sell it to pay off your mortgage. If the sale of your home doesn’t bring enough money to pay the remaining balance on your mortgage, then the lender files a lawsuit against you for the amount it lost on the sale, as well as costs, lawyers’ fees, and anything else they can think of. At that point, you lose the lawsuit, so the bank gets a deficiency judgment against you. This deficiency is the difference between the home’s sale price and the amount remaining due on the mortgage. And not only do you owe the bank this money, but you are also not allowed to live in the home.
The three main steps in foreclosure are these:
1. Answer the lawsuit. After the bank sues you, then you hire at attorney. You take copies of all your paperwork so your lawyer can review it. The your lawyer files an “answer” to the lender’s lawsuit. In the answer, your lawyer does not dispute that you owe the money. Instead, he cites any affirmative defenses you have, which are reasons you cannot be held liable for the mortgage balance. In addition, your lawyer may “counterclaim” against the bank, which are the legal claims you have against the lender.
2. Exchange information. The process of collecting information from the opposing party is called discovery. Your lawyer may send the lender written interrogatories (questions), take depositions by asking the bank’s representative questions under oath, ask for copies of the lender’s documents, and ask for admissions, in which the lender admits or denies your legal claims.
The time involved in answering the lawsuit and exchanging information is usually the longest part of the foreclosure process. The good news is these two steps often permit you to remain in your home for several months – or even a year – while both sides are pushing paperwork back and forth.
3. Compromise. While your lawyer and the lender’s lawyer exchange information, your lawyer will likely contact the lender’s attorney in an effort to agree on a compromise. You may find that a loan modification satisfies both sides. Types of loan modifications often include a deed in lieu of foreclosure, a short sale, reducing the principal on the loan, and reducing the interest and refinancing charges.
4. Bankruptcy. If you and your lender cannot agree on how to proceed, then you and your lawyer should discuss bankruptcy, either Chapter 7, which liquidates your assets, or Chapter 13, which allows you to set up a repayment plan.
The Constitution, which applies to all 50 states, is federal law. As such, your bankruptcy, which is permitted by the Constitution, is superior to the foreclosure action filed in state court.
The moment your lawyer files your paperwork with the bankruptcy Court, the judge issues an automatic stay, which puts all collection actions against you including the foreclosure on hold. This means the lender cannot take possession of your home, cannot sell your home, and cannot evict you from your home.
So while many people think bankruptcy is a humiliating experience, the fact is it benefits you and your family greatly. A bankruptcy (1) gives you many months, even a few years, to work out a compromise or loan modification with your lender, (2) stops all creditor efforts to collect money from you through a deficiency judgment, and (3) grants you permission to stay in your home as long as the Court’s automatic stay remains in place.
Summary: So don’t think of bankruptcy as a last resort. Think of it as an effective tool you can use to delay a foreclosure, giving you and your lawyer an opportunity to negotiate with your lender in hopes of finding a suitable outcome so you can stay in your home.
No doubt you have questions about bankruptcy and foreclosure, so please don’t hesitate to contact me. I work with these problems every day, and I’ll be happy to respond to your questions without cost or obligation. The bottom line is to keep you in your home, if that’s your goal, or to get the bank to release you from your mortgage obligation so you can build a strong financial future for you and your family.