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What will happen if my house is in foreclosure and I don’t file for bankruptcy?

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By Courtney Nagle | Friday April 3rd, 2020

Questions: What will happen if my house is in foreclosure and I don’t file for bankruptcy?

Dear Reader,

Foreclosure proceedings that run their course end with a public auction where the property is sold to the highest cash bidder or with the bank retaking the property. Depending on the state where you live, you may still owe the bank some money, and they could sue you to get it. If you file for emergency bankruptcy, you can temporarily stop this process. But, it is not a simple process, and it all depends on the type of bankruptcy you file. If your goal is to keep your home, your best option is to file Chapter 13. Filing Chapter 7 only delays the process, while Chapter 13 allows you to keep your home, you are required to meet with your lender and creditors to set up a repayment plan. If you fall behind in your payments, you can lose your home. Details about which bankruptcy is best for you are better discussed with an attorney who can help you understand your choices and inform you about what to expect in your current situation. However, nowadays, we have to look at the situation a bit differently since states have temporarily suspended evictions and foreclosures due to the coronavirus crisis. Check with your local authorities and attorneys to understand how these recent developments affect your situation.

Bankruptcy is not your only alternative to deal with foreclosure. During the pre-foreclosure period you have options to negotiate with your lender to keep your home. If you cannot do it on your own, enlist the help of a nonprofit housing counselor. Counselors can offer free services over the phone and online to help you negotiate a deal with your mortgage lender if it’s possible. Some of your options can include loan modifications, which usually entail refinancing your loan, reducing your interest payments, or extending the length of your loan to lower your monthly payments. Depending on your situation and the type of loan you have, you can explore additional options such as a partial claim or special forbearance programs.

In some situations, keeping your home is not always possible. Even then, you have alternatives to deal with foreclosure. To get released from the mortgage, you can look into a short sale or a deed in lieu. If you do a short sale, your lender agrees to sell your home for less than you owe and forgive the rest of the debt. Through a deed in lieu of foreclosure, you give up your home voluntarily to the bank in exchange for a release from the mortgage obligation.

All of these options have pros and cons, so they are best discussed with an expert that can help you navigate your choices, especially now in times of uncertainty and when new regulations are being adopted across the nation. I suggest you reach out to a housing counselor online or over the phone and get the guidance you need. Good luck!

Sincerely, 

Bruce McClary, Vice President of Communications

Bruce McClary is the Vice President of Communications for the National Foundation for Credit Counseling® (NFCC®). Based in Washington, D.C., he provides marketing and media relations support for the NFCC and its member agencies serving all 50 states and Puerto Rico. Bruce is considered a subject matter expert and interfaces with the national media, serving as a primary representative for the organization. He has been a featured financial expert for the nation’s top news outlets, including USA Today, MSNBC, NBC News, The New York Times, the Wall Street Journal, CNN, MarketWatch, Fox Business, and hundreds of local media outlets from coast to coast.

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Michigan license number:   DM-0016282 Available to the public and licensed in Michigan.

Section 13(1)  When a licensee establishes a debt management plan for a debtor, the licensee may charge and receive an initial fee of $50.00

Section 13(2)  A licensee shall attempt to obtain consent to participate in a debt management plan from at least 51%, in number or dollar amount, of the debtor’s creditors within 90 days after establishing the debt management plan. If the required consent is not actually received by the licensee, the licensee shall provide notice to the debtor of the lack of required consent and the debtor may, at its option, close the account. If the debtor decides to close the account, any unexpended funds shall be returned to the debtor or disbursed as directed by the debtor.

Sec. 14. (1) A contract between a licensee and debtor shall include all of the following:

(a) Each creditor to which payments will be made and the amount owed each creditor. A licensee may rely on records of the debtor and other information available to it to determine the amount owed to a creditor.

(b) The total amount of the licensee’s charges.

(c) The beginning and termination dates of the contract.

(d) The principal amount and approximate interest charges of the debtor’s obligations to be paid under the debt management plan.

(e) The name and address of the licensee and of the debtor.

(f) Any other provisions or disclosures that the director determines are necessary for the protection of the debtor and the proper conduct of business by a licensee.

Sec. 18. (1) In addition to the fee described in section 13(1), a licensee may charge a reasonable fee for providing debt management services under a debt management plan. The fee under this subsection shall not exceed 15% of the amount of the debt to be liquidated during the express term of the plan.

(2) A licensee may offer a debtor the option to purchase credit reports or educational materials and products, and charge a fee to the debtor if the debtor elects to purchase any of those items from the licensee.  Fees charged under this subsection are not subject to the 15% limitation on fees described in subsection (1).

(3) Except for a cancellation described in subsection (4), in the event of cancellation of or default in the performance of the contract by the debtor before its successful completion, a licensee may collect $25.00 in addition to any fees and charges of the licensee previously received by the licensee. This $25.00 fee is not subject to the 15% limitation on fees and charges under subsection (1).

(4) A contract is in effect when it is signed by the licensee and the debtor and the debtor has made a payment of any amount to the licensee. The debtor has the right to cancel the contract until 12 midnight of the third business day after the first day the contract is in effect by delivering written notice of cancellation to the licensee. A cancellation described in this section is not subject to, and a licensee shall not collect, the fee described in subsection (3).

(5) If a debtor fails to make a payment of any amount to a licensee within 60 days after the date a payment is due under a contract, the licensee may, in its discretion, cancel the debt management contract if it determines that the plan is no longer suitable for the debtor, the debtor fails to affirmatively communicate to the licensee the debtor’s desire to continue the plan, or the creditors of the debtor refuse to continue accepting payments under the plan.

(6) A licensee shall not contract for, receive, or charge a debtor an amount greater than authorized by this act. A person that violates this subsection, except as the result of an inadvertent clerical or computer error, shall return to the debtor the amount of the payments received from or on behalf of the debtor and not distributed to creditors, and, as a penalty, an amount equal to the amount overcharged.

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