What Are Your Options?

Alternatives to Foreclosure - What Are Your Options?

Depending on your circumstances, the lender may offer you temporary or permanent assistance. For example, the lender might agree to reduce or suspend your monthly payments for a specified period, after which you would resume your regular payments and pay an additional amount each month to make up for the delinquency. In extreme cases, the lender may even be willing to change the terms of your mortgage (for example, by lowering the interest rate, converting an adjustable-rate mortgage to a fixed rate, or extending the repayment term) in order to reduce your monthly payments.

However, not every situation can be resolved through your loan servicer's foreclosure prevention programs, and you might not be able to keep your home or YOU might decide not to keep it.

a. Foreclosure Prevention Options (Retention Options) - (Source: Federal Trade Commission)

Repayment Plan: Your servicer gives you a fixed amount of time to repay the amount you are behind by adding a portion of what is past due to your regular payment. This option may be appropriate if you've missed only a small number of payments.

Reinstatement: You pay the loan servicer the entire past-due amount, plus any late fees or penalties, by a date you both agree to. This option may be appropriate if your problem paying your mortgage is temporary.

Forbearance: Your mortgage payments are reduced or suspended for a period you and your servicer agree to. At the end of that time, you resume making your regular payments as well as a lump sum payment or additional partial payments for a number of months to bring the loan current. Forbearance may be an option if your income is reduced temporarily (for example, you are on disability leave from a job, and you expect to go back to your full time position shortly). Forbearance isn't going to help you if you're in a home that you can't afford.

Loan Modification: You and your loan servicer agree to permanently change one or more of the terms of the mortgage contract to make your payments more manageable for you. Modifications can include lowering the interest rate, extending the term of the loan, or adding missed payments to the loan balance. A loan modification may be necessary if you are facing a long-term reduction in your income.

b. Non-Retention Options - (Source: Federal Trade Commission)

Selling Your House: Depending on the real estate market in your area, selling your home may provide the funds you need to pay off your current mortgage debt in full, plus the expenses connected to selling the home (such as real estate agent fees). Servicers might postpone foreclosure proceedings if you decide to sell your home. Such a sale would also allow you to avoid late and legal fees and damage to your credit rating, and protect your equity in the property.

Short Sale: Your servicer may allow you to sell the home before it forecloses on the property, agreeing to forgive any shortfall between the sale price and the mortgage balance. This approach avoids a damaging foreclosure entry on your credit report. You still may face a tax liability on the amount of debt forgiven. Consider consulting a financial advisor, accountant or attorney for more information.

Deed in Lieu of Foreclosure: You voluntarily transfer your property title to the servicers (with the servicer's agreement) in exchange for cancellation of the remainder of your debt. Though you lose the home, a deed in lieu of foreclosure can be less damaging to your credit than a foreclosure. You will lose any equity in the property, and you may face an income tax liability on the amount of debt forgiven. A deed in lieu may not be an option for you if other loans or obligations are secured by the property on your home.

c. Other Options

Bankruptcy: Personal bankruptcy is generally considered the debt management option of last resort because the results are long-lasting and far-reaching. A bankruptcy stays on your credit report for 10 years, and can make it difficult to obtain credit, buy another home, get life insurance, or sometimes, even get a job. Still, it is a legal procedure that can offer a fresh start for people who can't satisfy their debts.

If you and your loan servicer cannot agree on a repayment plan or other remedy, you may want to investigate filing Chapter 13 bankruptcy. If you have a regular income, Chapter 13 may allow you to keep property, like a mortgaged house or car, that you might otherwise lose. In Chapter 13, the court approves a repayment plan that allows you to use your future income toward payment of your debts during a three-to-five-year period, rather than surrender the property. After you have made all the payments under the plan, you receive a discharge of certain debts.

To learn more about Chapter 13, visit www.usdoj.gov/ust, the website of the U.S.Trustee Program, the organization within the Department of Justice that supervises bankruptcy cases and trustees.

The NFCC has the largest network of credit counseling agencies approved by the Executive Office for the U.S.Trustees (E.O.U.S.T) to provide pre-filing counseling and pre-discharge education. NFCC agencies can be reached by calling (866)557-2227.

The NFCC Vision is to create a national culture of financial responsibility.

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