THE FORECLOSURE PROCESS AND HOW IT WORKS

If you are behind on your mortgage payments, its important to investigate your optionos as soon as there are signs of trouble. In order for a lender to foreclose on your house, they must go through and strictly comply with a process set forth in the California Civil Code Getting behind on your payments doesn't mean your in foreclosure; the foreclosure process officialy starts when a lender records what is called a "Notice of Default"(NOD) with the County Reocrder, They must send you a copy of the notice by certified mail. They have to wait three months, and then they have to publish Notice of Trustees sale in the local newspaper, letting you know that they are going to sell your property at a private or trustee's sale, usually held on the courthouse steps. They then have to wait 20 days after the notice is published before they can go to sale. In the meantime, you bring the loan current, or "cure the default, by paying all the past accrued, penalties, interest, and trustees fees. The longer you wait, the more you have to come up with.

LOAN MODIFICATION/SHORT SALES/DEBT SETTLEMENT

If you got into, or were duped into, a negative-am, fixed-variable, or adjustable loan rate on your mortgage which is coming due, or past due, you may be eligible for a modification of your loan through a workout with a lender. SHORT SALES: A short sale is simply a sale to buyer who agrees to buy your house and the bank agrees to accept less than the full amount due on the loan due to it. The problem with a short sale is that a) you have to find a willing, able, and qualified buyer before your foreclosure; and 2) your bank has to agree to the short sale. This doesn't benefit you, it only benefits the buyer and your real estate broker. Even if you find a buyer, if the transaction is not handled properly it may result in unintended adverse tax consequences to you.

WHAT HAPPENS WHEN YOUR LENDER FORECLOSES:

Many people who allow their house to go in foreclosure not only face having a foreclosure on their record, ruining their credit; they face an unknown danger of being sued for a deficency and adverse tax consequences as a result of a foreclosure. How it works is like this: Let's say you have a house that was worth $500,000.00 that is now worth say, $325,000.00. You have a first in the amount of $400,000.00 and a second with a balance of 100,000.00. Your real estate broker got in you in to your dream home on a 100%, income stated, fixed variable with "Great Bargain Mortgage Company." It's an 80-20 loan, and its a 2-28 or 3-27, and now the interest rate, instead of being 5 and 7%, is now 6-1/2 and 9%, and your payments are now $1,000.00 to $1,500.00 more a month. Between the rising cost of living, child care, groceries, you simply can't afford it anymore and eat too. The problem is that if you walk away from the house, the 1st forecloses and the 2nd, the junior lien is wiped out. There is no deficiency on the 1st because of the anti-deficiency laws found in CCP 580b and 580d, and the "one action rule" in CCP 726. But the second mortgage (even though it's owned by GBMC) can now sue you individually, because they are a foreclosed junior lienholder. It doesn't matter that they're the same lender as the 1st and it was a package deal. Ah, but it gets better! There's a hidden tax time bomb that's waiting to go off. If the lender forecloses or charges off the loan, this "forgiven debt" is treated by the IRS as ordinary income to you, The forgiveness of debt is offset by the fair market value of your house at the time of the foreclosure. But if you have a junior lien that is under or unsecured, the first mortgage forecloses and the junior lien is wiped out, instead of owing $100,000.00 to the bank, you now owe the IRS ordinary income tax on $100,000.00. Its a gift that keeps on giving. When your real estate broker got you into to this loan, he probably told you that don't worry about the adjustable interest rate, when real estate prices go up, we'll just refinance you and get you into a low rate, fixed interest loan. Unfortunately, your broker left out all the other little details, and he didn't have a crystal ball predicting the economic future of the real estate industry or the economy in general. So your dream house has now officially become your nightmare. Your choice is to file bankruptcy, and get rid of all your unsecured debt, like credit cards and medical bills. It doesn't get rid of the secured debt, however, and it doesn't change the terms of the loan. In a Chapter 7, a secured debt is not discharged, and you cant strip off a junior lien. If you file Chapter 13, you may be able to strip off the 2nd, but that's if you qualify and make the payments into the plan for the appropriate period.

THE MORTGAGE FORGIVENESS DEBT RELIEF ACT OF 2007

The Mortgage Forgiveness Debt Relief Act of 2007, enacted Dec. 20, 2007, provides an exception to rule that foregiveness of debt results in taxable income. Under this Act, taxpayers may exclude debt forgiven on their principal residence if the balance of their loan was less than $2 million. The limit is $1 million for a married person filing a separate return.

The new law applies to debt forgiven in 2007, 2008 or 2009. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, may qualify for this relief. In most cases, eligible homeowners only need to fill out a few lines on Irs Form 982 (specifically, lines 1e, 2 and 10b).

However, the law applies to debt primarily incurred in connection with purchase money loans, and must have been used to buy, build or substantially improve the taxpayer's principal residence and must have been secured by that residence. Debt used to refinance qualifying debt is also eligible for the exclusion, but only up to the amount of the old mortgage principal, just before the refinancing. That means that if you refinanced your house and took money out to pay bills, credit cards, pay for college or any other purpose other than home improvement, the gain on the debt forgiven does not qualify and you still have to pay the tax.

Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the new tax-relief provision.

Borrowers whose debt is reduced or eliminated receive a year-end statement (Form 1099-C) from their lender. For debt cancelled in 2007, the lender was required to provide this form to the borrower by Jan. 31, 2008. By law, this form must show the amount of debt forgiven and the fair market value of any property given up through foreclosure.

THE SOLUTION: A LOAN MODIFICATION WITH YOUR LENDER

Instead of filing bankruptcy, your other option, and possibly a better solution to your problem is to a do a loan modification with your lender, the Great Bargain Mortgage Company. By doing a loan modification, you can negotiate different terms for your loan (s), including a lower or fix the interest rate, reduce the principle, and agree on different terms, which might include rolling over or deferring the payments on your loan to the end of the term. In order to do so, you will need a skilled bankruptcy and real estate lawyer who is familiar with Federal and State Laws such as Real Estate Settlement Procedures Act (RESPA), and the Truth in Lending Act (TILA), The Fair Credit Reporting Act , and California's recent foreclosure deferment act. Through a loan modification, you can keep your house and your sanity.