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Bankruptcies – Foreclosure – Short Sale - Deed in Lieu There are five different types of bankruptcy outlined by the United States Bankruptcy Code. Each type of bankruptcy is identified by the chapter of the Code that describes the code. BANKRUPTCY Types of Bankruptcy Chapter 7 Bankruptcy Chapter 7 Bankruptcy also known as “liquidation,” "straight bankruptcy," or “complete bankruptcy,” is the most commonly filed form of bankruptcy among individuals. Chapter 7 Bankruptcy essentially allows the debtor to make a fresh start. When a Chapter 7 Bankruptcy has been filed, a trustee collects the debtor's nonexempt assets, which are then reduced to cash, and distributions are made to the creditors in accordance with bankruptcy law. In most Chapter 7 Bankruptcy cases the debtor receives a discharge releasing him or her from personal liability for certain dischargeable debts. You should consider a Chapter 7 Bankruptcy if there is no hope in repaying any of your debts, there are no cosigners involved, or if court action by creditors is imminent. Businesses that wish to liquidate their assets and discontinue business may also file under Chapter 7 Bankruptcy. Chapter 13 Bankruptcy : Adjustment of Debts of an Individual With Regular Income Chapter 13 Bankruptcy is designed for an individual who has a regular source of income, a desire to pay his or her debts, but currently is unable to do so. Chapter 13 Bankruptcy may be preferable to Chapter 7 Bankruptcy because Chapter 13 Bankruptcy usually allows the debtor to keep a valuable asset, such as his or her own house. Under Chapter 13 Bankruptcy the debtor may arrange and propose a plan to the Court. The plan illustrates how the debtor will repay creditors over time, between three and five years. The Court must then approve this plan. If the Court approves the plan, the debtor will make payments to the creditors through a trustee. The debtor is then protected from actions by creditors including lawsuits, wage garnishments, and actual contact with the debtor for the life of the plan. Upon completion of the plan, any remaining debts are discharged. You may consider filing a petition under Chapter 13 Bankruptcy if you owe debts that are not dischargeable under Chapter 7 Bankruptcy, such as taxes and child support, or if you have liens that are larger than the value of the assets securing the debt, you have years of unfiled taxes, you are behind or car or house payments, or your assets are worth more than the available exemptions. Chapter 11 Bankruptcy : Reorganization Chapter 11 Bankruptcy primarily applies to commercial enterprises that wish to continue business operations while repaying creditors through a court-approved reorganization plan. Under Chapter 11 Bankruptcy, the debtor has the right to file a plan of reorganization within 120 days after the order for relief. The debtor must provide creditors with a disclosure statement that allows the creditors to evaluate the plan, although whether the plan is approved is ultimately the Court’s decision. The debtor has a number of options under Chapter 11 for returning the business to profitability. These options include reducing debts by repaying a portion of them while discharging others, discharging burdensome contracts and leases, and rescaling operations of the business. Upon completion of the plan, the debtor usually has undergone a period of consolidation and emerges with a reduced debt load and a reorganized, and more profitable, business. FORECLOSURE If a home owner cannot make their mortgage payments as scheduled and falls behind, the mortgage lender can take back the subject property and sell it via legal channels as stipulated in the note of the mortgage loan contract. So, it’s very important for every home owner to understand how foreclosures work. Foreclosure proceedings can be initiated by the mortgage lender if the home owner lags behind his or her mortgage payments. Foreclosure is the legal route mortgage lenders take to repossess your home. Types of Foreclosures Voluntary Foreclosure A voluntary foreclosure is a foreclosure where you just turn in your keys to the mortgage lender. If you can negotiate terms with the mortgage lender that if you turn in your keys, they will not go after you for the deficiency, that is known as a deed in lieu of foreclosure. If the lender grants you a deed in lieu of foreclosure, the mortgage lender will not come after you for a deficiency judgment. A person can qualify for a 20% down payment conventional mortgage loan if they have a deed in foreclosure in just two years. Involuntary Foreclosure A involuntary foreclosure is when you fight the foreclosure to the end and the sheriff comes over and throws your belongings out. Most folks leave before they have a sheriff’s eviction. The mortgage lender can come after you for the deficiency and a judge can impose a deficiency judgement on you. Most mortgage lenders do not come after foreclosure deficiency judgments. Foreclosure on Foreclosure Proceedings There are ways of avoiding foreclosure proceedings. I strongly recommend that you contact your current mortgage lender and explain your situation. The mortgage lender does not want your home and will do everything possible to work things out with you. Explain them your current situation whether it is a loss of a job, sickness in the family, or divorce. The mortgage lender will want all of your current financial situation such as your gross monthly income and your monthly expenses. Forbearance Your mortgage lender might give you a 3 month or 6 month forbearance where they can add your delinquent payments to the back of your mortgage loan. Or they might want you to just pay property taxes and insurance and give you a break on the mortgage payments. SHORT SALE Short Sale and Pre-Foreclosure Sale A short sale is a sale of real estate in which the net proceeds from selling the property will fall short of the debts secured by liens against the property. In this case, if all lien holders agree to accept less than the amount owed on the debt, a sale of the property can be accomplished. A Short Sale is not to be confused with a Short Settlement. A short sale has two intrinsic and in severable components. A Short Sale is successful when (1) The Lien holder(s) (a.k.a. Mortgage Company) is agreeable to net less than the amount owed on the note (debt) as the result of (2) an arm's length sale at or below the Appraised Value for that property. The agreeable selling price is intrinsically defined to be at or less than the appraised value allowing the process to be attainable. A prudent buyer will not pay greater than the appraised value, and a Bank or Finance company will not provide a mortgage for greater than the appraised value, thus limiting the Short Sale proceeds to a maximum gross yield of the property's Appraised Value. It's important to understand that a Lien holder is not bound to accept the Appraised value and can demand a greater selling price. In this case, a "Sale" with a prudent arms length buyer is no longer a reasonable or attainable expectation. Instead the demand for greater than the Appraised Value (but less than the amount owed on the debt) is called a "Short Settlement". Some Lien holders will agree to a Short Sale but not a Short Settlement while demanding greater than the Appraised Value. This is a paradox as neither is achievable and both predestined for failure. Therefore, a "Short Sale" can only be accomplished when a Lien Holder is willing to accept less than what is owed on the debt while also agreeing to accept a sales price that is at or below the appraised value for the property. Creditors holding liens against real estate can include primary mortgages, second mortgages, home equity lines of credit (HELOC), homeowner association liens, mechanics liens, IRS and State Tax Liens, all of which will need to approve the sale in return for being paid less than the amount they are owed. The lien holders do not have to agree to accept less, but they often do since the alternative is to let the property go to foreclosure. A short sale is a more beneficial alternative to foreclosure and has become commonplace in the United States since the 2007 real estate recession. Other countries have similar procedures. For instance, in the UK the process is called Assisted Voluntary Sale. While both short sale and foreclosure result in negative credit reporting against the property owner, because the owner acted more responsibly and proactively by selling short, credit impact is less. You may qualify for a pre-foreclosure sale or short sale to avoid full foreclosure by selling your home for an amount that is less than your mortgage amount. DEED IN LIEU Deed In Lieu Of Foreclosure Deed in lieu of foreclosure is when you turn in your home keys to the mortgage lender and the lender agrees not to sue you for the deficiency. More specifically, a deed in lieu of foreclosure is a deed instrument in which a mortgagor (i.e. the borrower) conveys all interest in a real property to the mortgagee (i.e. the lender) to satisfy a loan that is in default and avoid foreclosure proceedings. The deed in lieu of foreclosure offers several advantages to both the borrower and the lender. The principal advantage to the borrower is that it immediately releases him/her from most or all of the personal indebtedness associated with the defaulted loan. The borrower also avoids the public notoriety of a foreclosure proceeding and may receive more generous terms than he/she would in a formal foreclosure. Another benefit to the borrower is that it hurts his/her credit less than a foreclosure does. If there are any junior liens a deed in lieu is a less attractive option for the lender. The lender will likely not want to assume the liability of the junior liens from the property owner, and accordingly, the lender will prefer to foreclose in order to clean the title. In order to be considered a deed in lieu of foreclosure, the indebtedness must be secured by the real estate being transferred. Both sides must enter into the transaction voluntarily and in good faith. The settlement agreement must have total consideration that is at least equal to the fair market value of the property being conveyed. Sometimes, the lender will not proceed with a deed in lieu of foreclosure if the outstanding indebtedness of the borrower exceeds the current fair value of the property. Other times, lenders will agree since they will end up with the property anyway and the foreclosure process is costly to the lender. Because of the requirement that the instrument be voluntary, lenders will often not act upon a deed in lieu of foreclosure unless they receive a written offer of such a conveyance from the borrower that specifically states that the offer to enter into negotiations is being made voluntarily. This will enact the parol evidence rule and protect the lender from a possible subsequent claim that the lender acted in bad faith or pressured the borrower into the settlement. Both sides may then proceed with settlement negotiations. Neither the borrower nor the lender is obliged to proceed with the deed in lieu of foreclosure until a final agreement is reached. A deed in lieu of foreclosure is sometimes better than a foreclosure because you will avoid a deficiency judgement. On a deed in lieu of foreclosure, you will not be liable for back taxes.
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