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Frequently Asked Questions
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What if I am in Bankruptcy, what can I do ?
What if I am in foreclosure, what are my options ?
what does a foreclosure scam look like ?
What is Minnesota's Equity-Stripping Statute ?
What if I am in Bankruptcy, what can I do ?
Bankruptcy Facts
Here are some facts to consider about bankruptcy:
Filing bankruptcy can be expensive: Court costs and attorney's fees add up, and are non-dischargeable. Depending on your situation, this is money that potentially could be spent bringing past-due accounts current, or making payment arrangements.
You may lose property: If your assets are worth more than state and federal exemption guidelines, they will be liquidated and the proceeds divided up among your creditors. This can include your home, car, heirlooms, and jewelry. If theirs any deficiency (meaning if your home and assets are liquidated and don't meet what's expected to divide amongst creditors) you will have to pay off.
It doesn't solve spending problems: Bankruptcy won't be much use if you spend more than you make. Because credit is available even after discharge (usually with astronomical interest rates), many people quickly descend into debt again. Sadly, 87% of all bankruptcy will lose homes. 70% to 80% of the chapter 13 bankruptcies lose their homes. Only 3% homeowners make it. Almost 50 percent of all people who file do so again as soon as the law allows (six years).
Not everything can be discharged: You can only walk away from such unsecured debts as credit cards and signature loans. So if a good portion of what you owe consists of student loans, tax debt, legal fees, or back child support, bankruptcy won't help.
Bankruptcy will stay on your credit report for seven to ten years: That's a daunting time frame for most people. The damage to your credit report can prevent you from renting an apartment, buying a home or car, or even acquiring life insurance. And many employers are now pulling credit reports to determine a candidate's responsibility and stability, so even your future job may be at stake.
Instead of filing bankruptcy: Assistance is available to help make a logical decision and inform you of foreclosure options. There usually exists a serious financial reason that leads to foreclosure, which must be identified and dealt with. Money management skills, family problems, or illness must be overcome in order to secure your housing.
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What if I am in foreclosure, what are my options ?
Foreclosure Options
The following section outlines many popular options a lender will offer to a borrower in default. It is important to remember that the lender may not want to work with a borrower. For help in determining which options are best for you, go to our Ask the Expert.
Forbearance
Forbearance is an agreement between the lender and the borrower that reinstates the delinquent loan through the payment of a lump sum or a schedule of payments over a period of time. If a borrower is behind in his or her payment by $2,000, for example, the lender may allow the borrower to pay the money back through installment payments over six months. The lender may decide, on the other hand, to allow the borrower to pay a reduced monthly payment until the borrower has an opportunity to get back on his or her feet and pay any remaining arrearages in one lump sum.
The forbearance may be an oral agreement or written contract between the lender and the borrower. Generally these agreements will not exceed more than 12 months.
Loan Modification
A loan modification is a change in any of the terms of the original note. This includes decreasing the interest rate, re-amortizing the remaining balance, extending the term of the loan, or other options at the lender's discretion to assist the borrower through a temporary set back.
Generally a lender will consider a loan modification when foreclosure is eminent and the borrower's income has been decreased or unable to make the mortgage payments, but will be able to keep the loan current after the loan modification.
Mortgage Refinancing
Mortgage refinancing is an option where the lender would allow the borrower to refinance his or her existing mortgage, wrap in any late payments and fees, and cash out part of his or her equity in the home to allow the borrower to regain control of a debilitating financial situation.
Refinances are generally open to borrowers that face a temporary set back in their financial situation, have shown outstanding credit history in the past, and can prove that he or she can support the new mortgage payment.
Second Mortgage, Line of Credit
A lender may offer a second loan or junior lien to a borrower in order to make up any back payments, late fees and other charges necessary to reinstate the loan. The borrower, in return, will be required to make an additional mortgage payment to cover the principal and interest payments on the second loan. Interest rates often rival credit cards and should be looked at with caution.
A borrower may also be able to borrower money from his or her bank or against a 401K or pension to use to repay the deficiency and reinstate the loan. Conditions may apply.
Sale of the Home
Selling a home is an alternative for borrowers that are unable to reinstate the loan and face eminent foreclosure. This option allows a home owner to try to salvage his or her credit, pay off the loan, and retain any remaining equity in the home. By informing the lender of this option, the lender may delay the foreclosure proceedings in order to allow sufficient time to sell the home.
In certain cases, the lender may allow the borrower to sell the home when the proceeds from the sale are not sufficient to pay off the existing loan. This is known as a short sale. A borrower should check with his or her lender to discuss this option. Furthermore, the borrower may have to pay taxes on any loss the lender writes off from the short sale. A borrower should consult his or her tax professional before agreeing to a short sale.
Deed-in-Lieu of Foreclosure (DIL)
A deed-in-lieu of foreclosure is a voluntary conveyance of title to the lender. Generally this is a last ditch effort by the borrower to avoid the negative consequences of foreclosure. In return for the voluntary conveyance to the lender, the borrower is often released of any personal responsibility for the mortgage.
In order to qualify for a DIL, most lenders state that there must not be a second mortgage or junior liens on the property. Properties with values in excess of the amount owed against the home (to include normal closing costs) should consider selling the property before voluntarily conveying the home to the lender.
There is free help and assistance for home owners facing the possibility of foreclosure. If you would like to talk with someone about your situation, call us.
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what does a foreclosure scam look like ?
Foreclosure Scams
Facing the threat of losing a home, a home owner will be plagued by individuals and companies offering to "help" the person out of his or her difficult financial situation. In most cases, these people are out for one thing--making money from someone's problems. These scams will come in many shapes and varieties...ranging from direct mail offering to "negotiate" on behalf of the home owner for a nominal fee to people knocking on the door offering to help out by reinstating the loan, taking title and leasing the home back to the individual. People facing foreclosure are vulnerable to con-artists and scams. However, using a little common sense any home owner can avoid being taken advantage of and find a viable and ethical solution for his or her dilemma.
In California, a lender initiates the foreclosure process by filing a Notice of Trustee Sale with the county recorder. This notice is the equivalent of posting a large 50 foot neon sign above someone's house saying, "Here I am, take advantage of me!" because shrewd individuals and companies know that the home owner is in trouble and will often times do anything to resolve the problem.
The following lists several ploys implemented by these individuals:
Short Term Loans. People may approach financially troubled home owners with the possibility of lending him or her a short term loan, and in some cases offer a loan with no payments for a certain period of time. These loans have high interest rates, require a balloon payments (where the home owner must pay off the loan by a certain date), or other features that may sound attractive. In reality, these loans are additional liens against a home and if the home owner fails to make a monthly payment or the balloon payment, the home owner could face foreclosure again.
Equity Splitting. Real estate agents (many claiming to be "pre-foreclosure" specialists) offer reinstate a person's loan and sell the house with the idea of salvaging any accrued equity and appreciation in the home. The catch is that the home owner must split the earnings with the agent instead of paying a commission. The reality is that the home owner could have hired a competent agent and accomplished the same end result with less money out of pocket.
Debt Negotiating & Counseling Agencies. Many companies, reputable and not-so-reputable, offer to negotiate or consolidate the debt for the home owner. The catch is that the home owner must prepay for these services (many the home owner can do on his or her own accord). These individuals do not offer anything that you cannot do on your own or that other non-profit agencies will provide free of charge. If you need a debt negotiating agency, contact your local Consumer Credit Counselors.
"Financial Service" Companies. There has been a proliferation of individuals, often posing as a financial services company, that offer to assist home owners facing foreclosure with everything from tax advising, debt management, real estate sales and pre-foreclosure sales. The reality of these individuals is that they do not run legitimate corporations (according the California Corporations Commission) and are not legally licensed as required by the California State Banking Department for debt or credit counseling. Be wary of anyone who wears a thousand hats for any occasion or pay money for their services upfront!
Visitors. Expect many people, including investors and real estate agents, to visit your home. They will paper your house with flyers, knock on your door at all hours, and stalk you and your family until they have an opportunity to speak with you. The worse perpetrators are individuals posing as government employees dispatched to your home to assist you. The lender, the County, and the Federal government will not send out personal representatives to assist you unless you have initiated the call to the right agency.
Bankruptcy. No matter what an attorney may tell you, bankruptcy does not stop foreclosure. It is true that bankruptcy does suspend the foreclosure process.
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What is Minnesota's Equity-Stripping Statute ?
Minnesota's Equity-Stripping Statute
June 2005
Countless books, articles, and even television infomercials offer advice on investing in distressed real estate. Many claim that residential properties in foreclosure present some of the best investment opportunities among all types of distressed real estate. Owners of residential property in foreclosure often have equity in their homes, yet for one reason or another are unable to save or protect that equity. Investors attempt to capture the equity and prevent it from flowing back to the owner's lender.
In the typical transaction, an investor in a residential property purchases the owner's interest for a fraction of the value of the owner's equity in the home, pays off the owner's debt against the property, and then sells the home to a third party for a handsome gain. This transaction is often a win-win situation for all if the homeowner no longer wishes to live at the property.
This type of transaction is not mutually advantageous, however, if the homeowner wishes to remain in possession. Unscrupulous investors have developed schemes designed to prey on homeowners facing financial trouble. These schemes, commonly known as "equity stripping," aim to convince owners that their homes can be saved, while in reality the home, as well as the owner's equity, will be lost to the investor. In a new law, effective August 1, 2004, the Minnesota Legislature took significant steps to prevent vulnerable owners from becoming victims of such schemes. That legislation contains a series of complex requirements applicable to nearly all transactions involving residential properties in foreclosure.
The new statute applies to transactions that qualify as "foreclosure reconveyances" under Minn. Stat. § 325N.10, subd. 3.
A transaction must contain both of the following components to constitute a "foreclosure reconveyance":
1. a transfer of title or creation of a lien by a foreclosed homeowner during a foreclosure proceeding;
2. a subsequent conveyance, or promise of a subsequent conveyance (including an interest in a contract for deed, purchase agreement, option to purchase, or lease), by the purchaser back to the foreclosed homeowner that allows the foreclosed homeowner to possess the real property following completion of the foreclosure proceeding.
Under this two-part test, an investor that purchases a home in foreclosure and does not provide the foreclosed homeowner any continuing rights in the home, whether under a lease or otherwise, will avoid the constraints imposed under Chapter 325N.
If the transaction is a "foreclosure reconveyance," Minn. Stat. § 325N.11 requires that all of the details of the transaction be contained in a written contract signed by the foreclosed homeowner and the purchaser. Minn. Stat. § 325N.12 identifies a list of terms that this written contract must contain, including a recitation of the total amount of consideration to be provided to the foreclosed homeowner and a notice to the foreclosed homeowner that it has five business days to cancel the contract. The statute also requires that a form "Notice of Cancellation" be attached to the foreclosure reconveyance contract. Chapter 325N also creates other substantive requirements that must be satisfied in any transaction that qualifies as a foreclosure reconveyance. For example, before entering into the contract, the purchaser must verify that the foreclosed homeowner has a reasonable ability to pay for the subsequent reconveyance. This will be presumed if: (1) monthly payments for housing expenses (which include principal, interest, rent, utilities, insurance, taxes, and association dues) and (2) monthly principal and interest payments on other personal debt of the homeowner, do not exceed sixty percent of the homeowner's monthly gross income. The purchaser may not rely solely upon a statement of assets, liabilities, and income furnished by the foreclosed homeowner, but instead must conduct independent due diligence.
Finally, if the property is ultimately not conveyed back to the foreclosed homeowner, Minn. Stat. § 325N.17(b)(2) requires the purchaser to pay the foreclosed homeowner, no later than 150 days following the owner's relinquishment of possession of the property, consideration in an amount that is at least eighty-two percent of the fair market value of the property (as determined by a licensed appraiser). This "consideration" includes payments made by the purchaser to satisfy debt or other legal obligations of the foreclosed homeowner. Thus, the statute essentially caps at eighteen percent the amount of equity an investor may "strip" from a residential property in a foreclosure reconveyance transaction.
The new equity-stripping statute also creates a private right of action in favor of the foreclosed homeowner for any violation of its provisions. The foreclosed homeowner may recover exemplary damages and attorneys' fees incurred in prosecuting an action in the event of a violation of the statute by a purchaser. Additionally, a foreclosure purchaser may be prosecuted criminally for certain violations.
Minnesota's new equity-stripping statute creates a regulatory framework that must not be ignored in any transaction involving residential property in foreclosure. While this statute creates additional protections for foreclosed homeowners, it also creates numerous pitfalls for investors in distressed real estate. The intricacies of the legislation, codified in Chapter 325N of the Minnesota Statutes, are beyond the scope of this article. If you are involved in a transaction involving residential property in foreclosure, you should work through the intricacies of this legislation with your attorney.
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