Home Foreclosure or Voluntary Home Surrender – What Happens Next?

Due to the lagging Michigan economy and high home foreclosure rates, many homeowners have lost significant equity in their homes. In many cases, their homes are no longer worth what is owed to the bank. Some homeowners can no longer afford their mortgage to due to a job loss or pay reduction. Some homeowners simply don’t want to continue to pay on a home that has no equity. Either way, there is confusion about what happens if a homeowner turns their property back over to the bank. Will they be held liable for the mortgage balance? Will it reflect negatively on their credit? Here are the facts.

If a homeowner should surrender their home (voluntarily or through a foreclosure proceeding) because it is worth less than what they owe on it, a mortgage company may come after the homeowner after the sale of the property for the difference between what the house sold for and what they owed on the mortgage. In Michigan, as long as a home is sold for current fair market value, the homeowner may be responsible for any shortfall that may occur.

• Example: If a person owes $175,000 on their home and the current fair market value is $125,000 and the house is sold for the $125,000 (either at the foreclosure sale or after the redemption period (when the bank has taken back the property)), then the homeowners may be responsible for the $50,000 shortfall.

However, if an individual files for a bankruptcy, either before or after a foreclosure, they eliminate any deficiency claims a mortgage company may have. Surprising to many, a bankruptcy looks much better on your credit report than a straight foreclosure. Under the Federal Housing Administration’s (FHA) guidelines, you must be two (2) years past a bankruptcy filing in order to qualify for an FHA mortgage. Under Fannie Mae or Freddie Mac guidelines you must be 3 to 4 years past a bankruptcy to qualify for a more conventional mortgage. If you have a foreclosure on your credit, and have done nothing else (no bankruptcy filing) then it will typically be 5 years before you can purchase a home under FHA or Fannie Mae and Freddie Mac guidelines.

• Why so much longer? Because without a bankruptcy filing, future creditors will not know if there will be a repercussions because of the foreclosure (i.e deficiency claims that may pop up). What do you do when you have a new house and then find out you need to pay a debt on the house you lost a couple of years ago to a foreclosure (lenders will not take this chance – hence the 5 years).

There are two options for consumer bankruptcy: Chapter 7 Debt Elimination and Chapter 13 Debt Consolidation.

Filing a Chapter 7 is a straightforward process in which you are legally able to eliminate your unsecured debts such as: Loan deficiency balances (discussed above), credit card debts, medical bills, personal loans, certain older IRS debts, etc. The Chapter 7 bankruptcy provides a fresh financial start by wiping your credit clean of many debts that you are unable to pay.

Chapter 13 is a debt consolidation program. This is a 36 – 60 month court-authorized repayment process in which you make your best efforts to pay back your debts. We propose your repayment plan and establish your monthly budget. Through the program you can legally stop a foreclosure sale, remove a second mortgage or home equity loan, stop a judgment or wage garnishment, halt vehicle repossession and much more. The program prioritizes paying principal debt, so you can expect your credit to improve throughout the course of the program as you reduced your debt-to-income ratio and create a positive payment history through timely, consistent payments to your creditors. No more late reporting to the credit agencies! If you have more debt than you can reasonably pay off in the 36 -60 month timeframe, we can reduce a portion, if not the majority of your unsecured debts. The program focuses on reducing debt and improving credit while providing court protection during the process.

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