How They Work
Foreclosure is a legal proceeding for a mortgage lender to sell a real property in satisfaction of the debt it secures. In Illinois, it starts with the lender filing a complaint in court, and then a sheriff serves the owner with a summons. The owner has the right to reinstate the mortgage or redeem the property before the deadlines. Under Illinois law, the lender usually may not sell the property until six or seven months after service of the summons, depending on the type of property, or three months after service of the summons, whichever is later.
If the sale results in a surplus after the mortgage is paid, it goes to the owner. If not, the owner can still owe the balance, called deficiency. The lender can sue the owner to collect the deficiency.
Short Sales
A short sale means a house is sold for less than what is owed. It requires the consent of the lender(s). A lender may agree to write off the balance, or reserves the right to pursue the borrower for the balance owed. Even if it writes off the balance, the lender may report the loss to the IRS, which becomes taxable income of the borrower. So, the borrower will owe the IRS for the taxes on the amount that is written off even though the borrower never received any money. However, if the borrower files bankruptcy before the short sale, the deficiency cannot be considered taxable income because it has been discharged in bankruptcy. In 2007, Congress Enacted the Mortgage Debt Relief Act of 2007, exempting mortgage deficiency related to one's principal residence from taxation. This applies only to one's principal residence and the exemption is scheduled to expire in 2012.
How To Stop Them
As explained above, being served with a summons does not mean the property owner will lose the property any time soon, but the clock has started ticking. There are several ways to stop a foreclosure:
- A forbearance agreement with or loan modification by the lender. Under those arrangements, the lender allows the borrower to catch up on the mortgage payment in installments, typically by paying a higher monthly amount until the mortgage becomes current, or changes the terms of the mortgage to make the payment more affordable. They do not stop the foreclosure until they take effect
- Refinancing. The new lender pays off the existing mortgage, and the property owner starts paying the new lender. The borrower must meet the new lender's requirements as to income, equity and credit score
- Sale by the owner. The property owner may sell the property any time before the lender does. The sale can either yield a surplus for the owner, or be a short sale, which requires the lender's consent and leaves the owner with a deficiency
- Bankruptcy. A bankruptcy filing halts the foreclosure proceeding. However, a Chapter 7 bankruptcy only stops the foreclosure temporarily, and the lender can obtain the bankruptcy court's permission to foreclose eventually. Only a Chapter 11, 12 or 13 bankruptcy can stop the foreclosure permanently, provided the property owner remains current on the post-filing mortgage payment and cures the pre-filing default within a required period.
Warning Against Commons Scams
- Lease/buyback In this common scam, an "investment company" offers to purchase your home for the balance of the mortgage, which cures the mortgage arrears and pulls the home out of foreclosure, and then lease it to you for the amount of the monthly mortgage payment. They agree to sell the home back to you in a few years for the purchase price.What often actually happens is that once you try to buy the home back, they either offer it to you at market price, thereby pocketing all of your hard-earned equity as profit or they refuse to sell it back to you. Since you will not have signed an enforceable real estate contract, even if they tell you the lease clause promising to sell it back to you is enforceable, it is not, you will lose the home anyway.
- White knight purchaser In this scam, similar to the lease/buyback scam, an "investment company" offers to assume your mortgage if you transfer the property to their name. You, in good faith, execute a deed to transfer the title of the home into their name and they never refinance or legally assume the mortgage. They also don't pay the mortgage. They either live in the home, rent free, until it is foreclosed upon or, more commonly, try to sell the home at a profit, which they keep. Either way, your credit is ruined and you get no money from the equity in your former home.
- Loan modification "specialists" This is trickier because there are several highly reputable, professional and ethical loan modification specialists in the Chicagoland area. Unfortunately, there are just as many unethical ones who will charge you a "refundable fee" and "guarantee" a loan modification. When they cannot get the mortgage company to agree to a modification, they point out the fine print in the contract that the refundable fee is subject to a one-time charge of most of the fee. You have spent a large amount of money, usually between $500 and $1,500, and received absolutely no benefit.
You can easily avoid this by doing your homework before paying anyone. Check with the Better Business Bureau, the Illinois Attorney General's Office, http://www.mortgagefraud.org/, and with your mortgage company. Search the company online and see what comes up. If they are reputable, you will be able to tell. Again, many are, but be careful.
