Once the foreclosure process has begun, the likelihood of successfully negotiating with your mortgage lender for a voluntary foreclosure alternative, such as a loan modification or short sale, is small. As such, this post focuses on your rights in Colorado– the options you have which the lender must comply with. For more information on alternatives, see the previous post about tools for dealing with an underwater mortgage.
First, A Tough Decision
While there are several different ways to address a foreclosure, the first question you must ask yourself is whether it makes sense to keep the home. As a result of the huge drop in home values, you may owe significantly more on your home than it’s worth. With some experts claiming that it may take as long as a decade for your home to regain its value, it may make the most sense to walk away from this bad investment and buy a new home once the market has stabilized.
You’ve Decided To Walk Away
In foreclosure, the lender has the right to sell your home at auction and sue you for the deficiency – the difference between what you owe on your mortgage and the actual sale price. The amount will likely be significantly larger than you expect, because the amount paid for the property at auction is regularly much less that what it would sell for normally. There is really only one good option to avoid being sued for a deficiency at this stage:
- Chapter 7 Bankruptcy – The collapse in the housing market has made bankruptcy the tool of choice for many who had never before considered it. Using a chapter 7 bankruptcy in conjunction with the foreclosure is often the best approach for three major reasons. First, chapter 7 will wipe out the deficiency and prevent you lender from suing you to collect it. Additionally, your credit cards, medical bills, and other debts can be wiped out at the same time, giving you a great opportunity at a fresh start.
Second, chapter 7 can dramatically increase the amount of time before you have to leave the property. A foreclosure sale generally occurs between 100-120 days after the process begins. If you hire an experienced attorney who understands how foreclosure and bankruptcy can work together for your benefit, the time before you have to leave your home can be doubled or tripled. Imagine saving the money you would otherwise be spending on rent for 4 – 6 months, and having plenty of time to find new accommodations.
Finally, if you’re going to let your house go, most people can qualify to buy a new home more quickly after a foreclosure in conjunction with a bankruptcy than most other forms of conveyance, including a short sale or deed in lieu of foreclosure. The post bankruptcy “seasoning” period can be as short as 2 years for an FHA loan, and just 1 year for a VA loan.
You’ve Decided To Keep Your Home –
If you have decided that it makes sense to keep your home and that you can afford to keep making payments, in Colorado you have several options after the foreclosure process has begun:
- Cure – You have the right to keep your home if you are able to cure the arrears. That means that you must get entirely caught up on all missed payments, plus any fees, prior to the foreclosure sale date. To take advantage of your right to cure, you must file a notice of intent to cure with the Public Trustee “no later than fifteen calendar days prior to the date of sale”, and pay the cure amount “[n]o later than 12 noon on the day before the sale”.
- Redemption – If you are unable to cure, you have the right to redeem your property by paying the full foreclosure sale amount within 75 days of the sale.
- Chapter 13 Bankruptcy – While the rights of cure and redemption require that you have a large amount of cash on hand, chapter 13 bankruptcy is a powerful tool which can allow you to both keep you home and, in some instances, dramatically reduce the amount you owe on it without making a huge upfront payment to your lenders. Chapter 13 will stop the foreclosure and allows you to get caught up on missed payments over a period of three to five years. Additionally you may qualify for what’s known as a Lien Strip. In a nutshell, if your home is worth less than the first mortgage, certain additional encumbrances like a second mortgage or line of equity secured by the property can be “stripped off” – that is, you’re no longer responsible for them. While bankruptcy is a time-consuming endeavor, the protections provided by the court often make it a smoother process that those listed above.
Remember that even though your home is in foreclosure, you still have good options. Contact an experienced foreclosure attorney as soon as possible to get achieve the best results.