22 Sep 2008

Behind on your mortgage? Know your options.

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It’s no secret that the combination of sky rocketing gas and food prices, high unemployment, and poor consumer confidence, together with the proliferation of adjustable rate mortgages, interest only loans, “pick-a-payment loans”, and tumbling real estate values have caused mortgage foreclosures to climb at an alarming rate. While other parts of Florida have been hit especially hard, Jacksonville and the surrounding areas of Orange Park, Ponte Vedra, Jacksonville Beach, and Atlantic Beach are too being hit hard.

To that end, we are finding that clients are unaware of their options when it comes to dealing with their mortgage company. For this reason, we want to provide prospective clients with a list of options and methods for avoiding foreclosure. It is important to note that if you have already been served with a foreclosure lawsuit, some of these options may no longer be available to you. If you have already been served with a foreclosure lawsuit, then you should immediately contact an attorney to learn what your options are and whether a Chapter 13 bankruptcy can save your home from foreclosure. Chapter 13 is a valuable tool that allows you catch up overdue mortgage payments, real estate taxes, and home owner’s association fees over time, typically 3 to 5 years. If however, you are not a party to a foreclosure lawsuit and have little or no other debt, then it may make sense for you to explore the following options with your mortgage company:

Repayment Plan/Forbearance – The most common method to cure a default is to enter a repayment plan. This will allow you to repay part of the past due payments, along with your regular payments. If you are unable to pay your mortgage due to a loss of income or increase in expenses due to circumstances outside your control (e.g., medical bills), then forbearance may make sense. Forbearance is where your mortgage company agrees to suspend payments or accept partial payments for a limited period of time until you are able to resume regular payments.

Reamoritization – If the mortgage company agrees to reamoritize your mortgage loan, the delinquency is added to the principal balance of your loan. This will bring your payments up to date. However, this increases your loan amount and your payments. The amount of the increase will not be as great if the length of the loan is also extended. Most loans are capable of being reamoritized.

Private Sale – Probably the most obvious of all choices is the private sale. If you cannot meet your mortgage obligation, a private sale may enable you to pay off the balance of the loan and receive any excess proceeds after all other lien holders and closing costs have been satisfied.

Short Sale – In essence, a short sale is where you sell your home for less than what you owe to the mortgage company and other lien holders. The mortgage company and any other lien holders must agree to accept less than full payoffs and to release their liens in order for the buyer to receive clear title. Because this process often requires the consent of many parties, it is a good idea to involve a real estate broker/agent that has experience and is familiar with short sales.

Deed in Lieu of Foreclosure – If you are unable to cure a default under any of the foregoing methods, then the mortgage company may consider a deed in lieu of foreclosure. Provided there are other liens on the property (e.g., second mortgage, judgment, homeowner’s association lien, etc.) you may be able to execute a deed transferring ownership of your home to the mortgage company.

It is worth noting that there may be tax consequences through a short sale, foreclosure, or deed in lieu of foreclosure. In these scenarios, the mortgage company rarely receives the full balance on the loan and the amount of the debt that is “forgiven” may be viewed as income for that tax year by the IRS.

For example, if you owed $200,000 on your home and you received an offer for $150,000 and your mortgage company accepted the offer (a short sale) then the IRS would view the $50,000 difference as income in that tax year. The result – you would owe taxes on $50,000. However, you may be able to avoid paying that tax by filing a form 982 with the IRS. Form 982 states: “[g]enerally, the amount by which you benefit from the discharge of indebtedness is included in your gross income. However, under certain circumstances described in section 108, you may exclude the amount of discharged indebtedness from your gross income”. One such “circumstance” is if you were insolvent prior to the triggering event. If you were insolvent, then you may be able to “exclude” the amount forgiven from being added to your gross income for that year. It would appear however, that the exclusion on only applies to your principal residence and not investment or rental property.

If you have questions about foreclosure, bankruptcy, or any other debt related matters, feel free to contact us by telephone at (904) 652-2400 or, by e-mail at info@johnsonlawpa.com.

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