Stop Foreclosure Without Bankruptcy
While it’s a great way to stop foreclosure, bankruptcy is a life-changing financial decision. It’s understandable that many people will want to avoid foreclosure without resorting to bankruptcy.
Why Avoid Bankruptcy When Facing Foreclosure?
Bankruptcy can completely freeze the foreclosure process and give you a chance to get your debts and finances in order to make payments. It’s a great way to save your house—but there are tons of unintended consequences to bankruptcy. If the rest of your finances are in pretty good shape, or you have a lot of secured debt that will be collected on, then bankruptcy can be a bad option for you. Bankruptcy also stays on your credit report for a long time, which can really prevent you from getting future loans and financing.
Ways to Stop Foreclosure Without Bankruptcy
If you want to avoid foreclosure and you want to avoid bankruptcy, you have only a few options.
Reinstatement (Curing Default)
Reinstatement, or curing the default, means that you pay the lump sum which is owed on your loan. The bank cannot legally foreclose on your property if you pay what you owe. Of course, in addition to missed payments and future payments, you are also going to have to cover fees, interests, and any costs that are leveraged against your loan. If you are able to make reinstatement by paying the lump sum, you can then continue paying monthly mortgage payments like normal.
What are the drawbacks to reinstatement? Only the minor damage to your credit score because of missed payments. Any missed mortgage payments and parts of the foreclosure process will go on your credit score. It won’t be as bad as actual foreclosure or bankruptcy, but it can still damage your credit.
Loan modification allows your foreclosure company to modify the loan payments that you owe every single month, which can help you bring the balance of the loan current. Modification is usually only available for people in specific circumstances: you need to have experienced a kind of financial hardship that prevents you from continuing to make monthly payments over the lifetime of the loan, but the hardship cannot be so complete that you are now unable to make any kind of payments on the loan.
In situations where you have not experienced a permanent reduction in income (or not a great permanent reduction in income), forbearance allows you to catch up on missed payments by paying above and beyond the mortgage value for 3-6 months to bring the balance current. Usually forbearance will have you pay 1.5x the amount of the monthly payment until you’ve caught up. Obviously, this only works for people who had a financial emergency or extenuating circumstances that prevent them from paying for a couple months. Overall you must be in strong financial health to avoid forbearance.
Refinancing is similar to modification, but it is not quite the same. In modification, your monthly payments are adjusted through the rest of the mortgage. In refinancing, your mortgage is completely paid off and totally replaced with a new mortgage. Traditionally, you pursue refinancing if you think you can get a better deal on the current mortgage that you have.
But there are times where refinancing can actually save your mortgage from going into bankruptcy. For example, if you know that you are going to struggle to make payments in the near future and have made consistent, quality payments for over a decade—you might be able to apply for refinancing. The key for refinancing is that you need a great credit score to qualify, so you will probably only be able to get refinancing before you’ve begun missing payments.
This is really difficult to get and should only be used as a last option when everything else has failed, but you can actually sue the mortgage lender for an emergency injunction. The injunction can stop foreclosure for a set amount of time, and is granted only in extreme circumstances. It’s usually far easier to file for bankruptcy than try to get an emergency injunction, but know that it’s an option.
Reasons that you might be granted an emergency injunction usually revolve around a failure of the lender to comply with state laws. For example, if the lender cannot prove that they own the promissory note, then they cannot foreclosure. If the lender didn’t do everything in compliance with state requirements, the Homeowner’s Bill of Rights, or the foreclosure process itself—then the foreclosure may not go through or might be delayed.
Again, usually these injunctions are a temporary stay of foreclosure at best. They buy you a bit more time to put your finances in order, but don’t completely neutralize the threat of foreclosure.