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Justin Harelik, the Bankrate.com Bankruptcy AdviserDo's and dont's for fending off foreclosure

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Dear Bankruptcy Adviser,
I just received a notice of default letter from my mortgage lender that says my house will go to auction sale in four months. Can house still be sold by owner?
-- Sue

Dear Sue,
It appears that you are right in the beginning of the foreclosure process, but as long as the house is still in your name you can save it. While you need to be careful, you also need to act quickly. Four months can seem like a long time but it can go by in a flash. So let's get right down to what your options are.

7 possible do's when foreclosure looms:
Sell the property.
Work out a deal.
Refinance with a subprime lender.
File Chapter 7 bankruptcy.
File Chapter 13 bankruptcy.
Short sale/deed in lieu of foreclosure.
Walk away from the house.

1. Sell the property: If you can find a buyer before the house is auctioned, you can sell it and keep whatever equity still exists.
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2. Work out a deal: Your lender may be willing to work with you, rather than lose money at a foreclosure sale.

3. Refinance with a subprime lender: Your credit is poor right now because of the mortgage delinquencies. This means most or all of the traditional banks will not work with you. However, if there is equity in the property, you may be able to find a lender who will refinance you -- at a higher-than-normal rate. These are called subprime loans, and they're increasingly common: About 20 percent of mortgages today are subprime.

4. File Chapter 7 bankruptcy: If you can't get caught up in time, you will not be able to keep the house -- but you'll generally be able to delay the foreclosure sale a month or even several months. Any remaining debt to the lender will be wiped out.

5. File Chapter 13 bankruptcy: If you can afford to make the future mortgage payments and the delinquent payments, too, file for a Chapter 13 bankruptcy. This is different than Chapter 7, in which assets are liquidated but debts are wiped clean. With Chapter 13, you keep your assets and, under court supervision, you repay your debts under a three-to-five-year plan.

6. Short sale/deed in lieu of foreclosure: A short sale takes place when the bank allows you to sell your property even though their mortgage won't be paid. Be careful -- the bank may allow the sale to go through, but only on the condition that you repay the deficiency. In a deed in lieu of foreclosure, the property is signed over to the bank in exchange for the bank giving up its rights against you. When might a bank agree to either of these? Lenders spend close to or more than $30,000 to foreclose on a property. Most lenders will consider these options to avoid foreclosure costs.

7. Walk away from the house: Pack your things and leave. The only issue remaining is whether your lender can sue you for any deficiency still owed after the sale, and that depends on the state you live in and the type of mortgage you have. You'd be wise to speak to an attorney before taking this step.

Any sale or transfer of property has tax consequences, including a foreclosure sale or a deed in lieu of foreclosure. Seeing an accountant is probably a good idea, as well.

Here are two options NOT to consider. In other words, they're scams.

2 don'ts when foreclosure looms:

Sue, you have options, but you need to avoid the scams and act quickly if you want to have the best outcome. Delaying only makes foreclosure inevitable.

Justin Harelik is a practicing attorney in Los Angeles. To ask a question of the Bankruptcy Adviser, go to the "Ask the Experts" page and select "bankruptcy" as the topic.

Bankrate.com's corrections policy-- Posted: Dec. 26, 2006
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