How To Avoid Foreclosure was the theme at the recent Contractors Assocation of Kauai Housing Fair, where I was asked to speak by the Kauai Board of Realtors.
To get started, Bloomberg.com gives a good overview of options available to avoid foreclosure in the following video report;
“What you don’t know about foreclosure can hurt you” was the topic of my presentation. Myths and misunderstandings about foreclosure add confusion to a scary situation. Information is powerful; however misinformation can be damaging. The first step in moving forward, is to address the….
Top 5 most dangerous myths about foreclosure;
- I can just walk away; often referred to as a “Strategic Default,” many people think they can just walk away from the property and let the lender have it. While this may sound attractive emotionally, the lender will foreclose and you’ll face either a 1099 from the lender, or a deficiency judgment. It’s very important to work through your situation and find the best possible solution. Sometimes people have moved on, and years later face ugly collection efforts from their previous lender after their financial situation improved.
- If my house is in foreclosure, I have to move out right away; it may be uncomfortable, but your best option is to stay in your home as long as possible. Whether trying for a loan modification or a short sale, lenders will be more negotiable if you are living in the home. Also, there are mortgage clauses that state if the property is “abandoned” the lender can escalate the foreclosure process. Even if you choose to allow the foreclosure to go through, many lenders offer “cash for keys” to homeowners instead of an eviction. Use this time to prepare your move.
- Once the foreclosure is over, the bank can’t collect on the loss; many articles on the internet are confusing due to the fact that state laws vary. Some states have non-recourse foreclosures where the lender doesn’t come after the deficiency (or loss) after the foreclosure is finished. However, Hawaii is a recourse state. The lender will either issue a 1099 on the loss, which the IRS recognizes as income, or they will reserve the right to pursue a deficiency judgment, trying to collect on the balance of their loss.
The Mortgage Forgiveness Debt Relief Act of 2007 provides a means for homeowners to be exempt from that tax if it’s your primary residence or you can prove insolvency. Please consult your CPA.
- If I have a Non-Judicial foreclosure, the lender can’t go after the deficiency; this is incorrect and a common misunderstanding, even among professionals. They aren’t as likely to since they have to file a motion to pursue it. But unless they issue a written release of this right – it remains a possibility, and could haunt you years later.
- Lenders aren’t pursuing deficiencies now, so I don’t have to worry; Unfortunately, I’ve heard that people have been told this by trusted professionals. While lenders may not be pursuing deficiencies now due to their overload of distressed properties, there are attorneys and credit collection companies gearing up for the next market opportunity – debt collections from foreclosures.
The 2nd and 3rd part of the presentation follow;