Short sale? Foreclosure? Something else?
December 14, 2016 12:53 AM   Subscribe

I can't pay my mortgage in January. My job was eliminated in July, and I'm currently working as a contractor for 70% of what I was making earlier in the year, and about 50% what I was making 18 months ago.

My wife is battling serious (life threatening) health issues and just lost her job due to medical appointments interfering with work. We live in an employer friendly state, and it was a small company below the threshold for FMLA protections. Realistically she won't be able to return to work until February.

And a stupid decision I made with the mortgage 10 years just came home to with my mortgage payment doubling in January. We are upside down on the mortgage by a lot.

I don't care about keeping the house, and actually moving to a lower cost of living area (my job is portable) is a pretty good idea because my wife's career was high stress and we don't think it's healthy for her to continue. I'd like to be in a position that she doesn't have to return to her career immediately.

I'm facing decision paralysis between talking to a bankruptcy attorney, just not paying the mortgage and listing the house as a short sale, or just walking away and letting the chips fall where they may. We live in a recourse state that allows deficiency judgements, and I'd rather not get sued for money I don't have.

I'm not even sure who to talk to get clarity on my options. Bankruptcy attorney? Real Estate attorney? Should I call the mortgage company and tell them I can't pay?

Any insight from the experience of those that have been through this would be appreciated.
posted by anonymous to Work & Money (10 answers total) 1 user marked this as a favorite
Consult with a bankruptcy attorney but I know someone who just faced an identical situation (divorce/mental illness). They stayed in the house for several months without paying the mortgage (and saved the cash for the move and first/last payments). After the foreclosure notices got pretty intense they moved, let the bank forclose, I believe they waited for the rescourse judgement to be made and then declared bankruptcy. For just a couple thousand in lawyer fees it kinda all went away. I was honestly surprised by how well it all turned out.
posted by saradarlin at 1:24 AM on December 14, 2016 [10 favorites]

Your state attorney general may have a program to help distressed homeowners modify their mortgages. I would look at their website. Your servicer may also offer modification. However, this is likely to be a strenuous process encumbered by the general incompetence of the servicer. You should really only attempt to undertake it if you can reasonably anticipate that you will return to an income that will allow you to service the debt again. It sounds as if you don't think that's likely.

Otherwise, yes, you should talk to a real estate attorney to explain the process and a bankruptcy attorney to see what you'd have to do if the deficiency judgment were too large. Are you entirely sure that a sale would have to be short? A sale would only have to cover the remaining amount of the mortgage. 2006 was of course a terrible time to buy a house but if you've been in it for ten years you should have begun making a good dent in the mortgage and housing values have made a recovery in many areas.

(Also, I'd give that mortgage reset considerable scrutiny. The average initial interest rate on a 10/1 ARM in 2006 was around 6%. With current extremely low interest rates, I'm surprised to hear that your payments aren't dropping.)

Basically, don't get terrified, freeze up, and start ignoring your mail. There's an orderly way out of this, even if it's a lot to ask of you at a time when your wife is very ill. Good luck.
posted by praemunire at 1:58 AM on December 14, 2016 [7 favorites]

Definitely talk with a bankruptcy attorney. Because the specifics can vary somewhat depending on the laws in your area, that is the best starting point for understanding that option. saradarlin already suggested a likely general course of action, but the steps that need to be taken to lock that in may not be entirely straightforward.

The downside to the bankruptcy is that this will haunt your credit score for years to come, so do be certain that you've exhausted other avenues. That means that also talking to a real estate attorney might be a good idea, to see if there's some option you've missed.

The upside to the bankruptcy would be that you stop paying on the mortgage but keep living where you are for a period of time, which you should absolutely consider as a side effect benefit of a bankruptcy strategy. Please remember that bankruptcy is a benefit offered by our society as a safety net for exactly what has happened to you, and you should not feel terrible if you were to pay all your medical expenses and groceries onto a credit card and get it all wiped out through bankruptcy. The point is to come out on the other side of it in a financial condition where you are more likely to be successful going forward.
posted by jgreco at 2:16 AM on December 14, 2016 [3 favorites]

You don't need a bankruptcy attorney. You need a foreclosure or debtor-creditor defense attorney (assuming US). There are ways to negotiate release from a mortgage you can't pay but it's complicated and variable by jurisdiction and a different process than renegotiating ALL your debt (bankruptcy). Start with the legal aid agency in your community that does housing issues. If they don't do foreclosure defense, they will know who does.

I spent the worst the years of my life in a law firm which did high volume foreclosure. Don't jump straight to bankruptcy unless you have issues with all your bills and debts.
posted by crush-onastick at 4:40 AM on December 14, 2016 [4 favorites]

You can have a conversation with the modification department of your loan servicer. They don't want to foreclose and may be willing to reduce the (new) interest rate or payment considerably. If you don't have equity AND want to move anyway notwithstanding a possibly lower mortgage payment, you can negotiate a short sale authorization or a "deed in lieu of foreclosure" which is basically an agreement to move out and hand over the keys would no future consequences. If your local real estate market is healthy, deed in lieu is MUCH easier for you.

One of the perverse problems with mortgage servicing is that many of them won't have these discussions now, but only after you've missed a couple of mortgage payments. As long as you're paying they won't discuss anything besides your continuing to pay...

There are good lawyers for this but MANY terrible and some outright scammer lawyers and "services." Be careful and get good references.
posted by MattD at 6:30 AM on December 14, 2016 [3 favorites]

Deed in lieu and short sales are much much better alternatives for all parties than foreclosure or bankruptcy. As Matt said though normally you have to miss a few payments before the loss mitigation dept at your servicer will be willing to discuss these options.
posted by TestamentToGrace at 8:52 AM on December 14, 2016 [1 favorite]

Yes, in case I wasn't clear, talk to the real-estate attorney first. Bankruptcy is for backup in case things go poorly. Don't jump straight to bankruptcy.
posted by praemunire at 10:03 AM on December 14, 2016

+1 to the suggestion of googling for public resources in your jurisdiction, such as something run by your state or county government, or something run by a Legal Assistance Foundation-type group. They will have information and referrals to non-scammer professionals. In my jurisdiction, the county court that handles foreclosures has public assistance/counseling in the courthouse.
posted by Mid at 10:36 AM on December 14, 2016

Checking in to say that as someone who went thru this three years ago .. our bank wouldn't even talk to us until we were at least 4 payments behind.

We saved that money up, and by the time the mortgage company had started telephoning us, we had decided that foreclosure was our best option since we wanted out of the crime-ridden area we'd lived in for 20+ years. The foreclosure didn't happen until our 14th month .. so we had all that money saved up, and I kept it saved up until it came time to pay taxes (we do not live in a recourse state, so YMMV of course). Fortunately for us, the taxes on a foreclosure were non-existent in 2014. I do not know if that's the case this year or not, or next year.

To be clear, the taxes would have been on the difference in amounts between actual value and what the house was sold for by the bank. In 2014, that difference came to around $20k, which would have nearly doubled our taxes.
posted by dwbrant at 1:22 PM on December 14, 2016

You may want to line up your future living arrangements before a foreclosure/bankruptcy hits your credit report. I'd think most landlords (especially if it's some sort of apartment or condo owned by a leasing company) would/could deny you with that on your record. Some states have pretty tenant-friendly laws and they aren't going to want to get stuck with a tenant with a record of not paying rent/mortgage for months at a time and needing to go through a long legal eviction process.
posted by Mr. Big Business at 12:43 PM on December 15, 2016

« Older Printable or e-gift cards for someone moving to...   |   "I realize that I seem fine, doctor, but..." Newer »
This thread is closed to new comments.