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Wednesday, March 9, 2011

Filing for Bankruptcy could save your home from foreclosure

Filing for bankruptcy could save your home
For some struggling homeowners, desperate step could stop a foreclosure


By the time the foreclosure notice arrives, most struggling homeowners figure they are out of options. But there is one more step, often overlooked but sometimes effective: bankruptcy.

It's not a move to be taken lightly. But the impact — especially on your chances of getting a loan — may not be as dire as many consumers assume. In fact, homeowners facing foreclosure may be able to improve their credit with a bankruptcy filing.

Bankruptcy is not the best first choice for anyone struggling to pay the bills. The first step is to approach lenders or others to whom you owe money and see if you can work out a more affordable payment plan. If you're unable to do so on your own, an accredited credit counselor may be able to intervene with lenders on your behalf.

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If none of those steps work, bankruptcy may provide relief for the worst case of a foreclosure judgment - and inflict less damage to your credit.

"In the eyes of lenders, you're making an attempt to pay back what is owed and keeping up with your payments," said Raquel Price, a bankruptcy attorney in State College, Pa. "With a foreclosure, you simply just walk away after not paying for a period of time."

Bankruptcy laws, after all, were established to provide an orderly process for people in financial trouble to reorganize their debts, start fresh and rebuild their lives.

Advertise | AdChoicesAdvertise | AdChoicesAdvertise | AdChoices"Most people who file bankruptcy don't file because they are poor managers of credit," said John Ulzheimer, president of consumer education for "Most people file because of some other incident that is out of their control - like a divorce, or loss of job, or the death of an earner in the family or some major medical event that zaps out their savings."

With home prices falling, unemployment near 9 percent and wages stagnant, the volume of fillings continues to rise. Last year, some 1.5 million consumer filings were reported — up 9 percent following double digit gains in each of the previous three years, according to the American Bankruptcy Institute.

As government mortgage relief programs have fallen well short of their goals and lenders struggle to find solutions, bankruptcy has become a potent weapon for those hoping to save their home from foreclosure.

Last year, foreclosure filings were reported on a record 2.9 million homes in the U.S., up nearly 2 percent from 2009 and 23 percent from 2008, according to RealtyTrac. More than one in five homeowners with a mortgage owe more than their house is worth, according to the latest figures from CoreLogic. That number of so-called "underwater" mortgages is expected to increase if home prices continue the current trend of edging lower.

A bankruptcy filing won't guarantee you'll be able to keep your home. But it stops the process and buys time while the court reviews your finances and tries to work out a payment plan with lenders.

The mortgage industry supports the current bankruptcy process because it frees many borrowers from some unsecured debts, making it easier for them to support a home loan. But the industry has strenuously fought legislative proposals to change the law to allow judges to alter the terms of a mortgage, including writing down the principal owed — a process known as a "cramdown."

Contrary to widely-held belief, bankruptcy doesn't necessarily leave the filer without access to credit.

"I hear that every day from people coming to my office: 'I thought it takes seven years to rebuild your credit,'" said Michael Fakhoury, a bankruptcy attorney in Poughkeepsie, N.Y. "It's not true."

Credit card offers
Though the record of a filing typically remains on your credit report for seven years, many filers begin getting credit card offers within a year or two after the process is completed.

Personal bankruptcy takes two forms. In a so-called Chapter 13 bankruptcy, debts are consolidated and a payment plan is arranged — typically over three to five years. This process allows you to retain assets like a house or car and some savings (the rules vary somewhat state to state). Chapter 13 is required for those whose income falls above a "means test." Once you've filed, you're not allowed to file Chapter 13 again for another two years.

A Chapter 7 bankruptcy discharges most forms of debt — usually within six months. To qualify, you have to be current on secured debt payments such as a mortgage.Some debts, including student loans, alimony or child support, can't be discharged. With Chapter 7, you can't file again for eight years.

Once the process is complete, credit card companies will likely come calling again within a year or two offering credit, according to Fakoury.

Advertise | AdChoicesAdvertise | AdChoicesAdvertise | AdChoices"They know that you don't have any more debt — you just got rid of all your debt," he said. "So you're a good credit risk."

Opening new accounts and establishing a solid record of timely payments will help improve your chances of getting more credit, according to Ulzheimer.

"The most predictive item on your credit report is the item that's less than 24 months old," he said. "So if you can start populating your credit reports with good things, you're going to accelerate your score improvement much more aggressively than if you just sat there and waited for your score to improve as you put time between yourself and the bankruptcy filing."

Getting a mortgage after a bankruptcy filing is a little tougher, largely because underwriting guidelines have tightened for all borrowers since the housing bust. To qualify for a so-called "conforming" loan backed by government mortgage sponsors Fannie Mae or Freddie Mac, you'll need to wait four years after a bankruptcy filing.

But you'll be ineligible for seven years after a foreclosure — another reason it might make more sense for some homeowners to file for bankruptcy rather than wait for a foreclosure.

For an FHA-backed mortgage, you may be able to qualify within three years of a foreclosure, or two years after completing a bankruptcy. For Chapter 7, the clock on FHA eligibility starts when your discharge is complete, usually within six months of the filing. For a Chapter 13, you'll have to wait two years after the payment plan is completed, usually three to five years.

Lenders are also going to want to know why you ended up in bankruptcy court, according to Chad Smith, senior vice president of sales at Lending Tree, a mortgage lender.

"Most underwriters are going to want to know what happened in a detailed letter of explanation," he said. "If it’s a life event, that's going to be reflected differently than if it's excessive spending."

Filling for bankruptcy won't guarantee you'll be able to save your home. For some homeowners, the financial hole is just too deep.

"That is a very hard talk to have with them — explaining that no matter what I try to do they won't be able to sustain their residence," said Price. "For some clients that is a very tough thing to accept."

Wednesday, March 2, 2011

Calif. distressed homes sell at 39% discount. OC Register


According to RealtyTrac, there were 211,839 foreclosure-related sales in 2010 in California – a third-party sale of a distressed property that occurs while the property is actively in some stage of foreclosure, from default to bank-owned.

According to the Irvine-based foreclosure tracking firm’s year-end study:

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The state’s 2010 foreclosure-related selling pace was 42% below 2009 and 30% below 2008. Nationally, foreclosure sales were 31% below 2009 and 14% less than 2008′s pace.
California foreclosure sales accounted for 44 percent of all sales in 2010, the third highest of any state but also down from a peak of 57 percent in 2009. Fourth quarter foreclosure sales in California accounted for 45 percent of all sales, up from 40 percent in the third quarter. foreclosure homes accounted for nearly 26 percent of all U.S. residential sales during the year, down from 29 percent of all sales in 2009 but up from 23 percent of all sales in 2008.
The average selling price of a California foreclosure-related home was $251,693 – that is a 39% “foreclosure discount,” the percentage difference between average sales price of foreclosure sales vs. average sales price of non-foreclosure sales. Nationally, the foreclosure discount was 28%
These discounts in California ranged in 2010 from 46% for bank-owned properties to 29% for homes sold before lenders seized a property. National foreclosure discount was 36% for bank-owned homes and 15% for homes sold before lenders seized a property.
RealtyTrac notes: “Foreclosures continue to represent a substantial percentage of all U.S. residential sales and continue to sell at an average sales price that is significantly below the average sales price of properties not in foreclosure — the result of a bloated supply of foreclosures and weak demand from homebuyers. The catch-22 for 2011 is that while accelerating foreclosure sales will help clear the oversupply of distressed properties and return balance to the market in the long run, in the short term a high percentage of foreclosure sales will continue to weigh down home prices.”

DataQuick: San Diego foreclosures up 34% in January

From The San Diego Union Tribune:

Foreclosures and mortgage defaults in San Diego County both increased in January, after three consecutive months of drops, Wednesday's DataQuick Information Systems numbers show. The upticks could signal an incoming wave of distressed properties coming onto the market in coming months, experts said.

Foreclosures rose to 959 in January from 715 in December, a 34 percent increase, the largest monthly jump since December 2009. Year-over-year, foreclosures fell from 986 in January 2010, or 2.7 percent.

There were 1,548 mortgage defaults in January, up slightly from 1522 in December, or 1.7 percent. Year-over-year, that number is down from 1,741 in January 2010, or 11.1 percent.

DataQuick spokesman Andrew LePage said the monthly jump in foreclosures could partly be due to "a little catch-up" after some banks froze foreclosure activity following discoveries of robo-signing, the practice of approving loan paperwork without proper review.

LePage added that monthly fluctuations in both data sets are normal given factors such as the role of government mortgage programs, lender log-jams and new housing laws, he said.

"We don't expect any smooth trend lines going forward," LePage said. But there's "more catch-up to come," he said.

Bob Kevane, president of the San Diego Association of Realtors, agrees more foreclosures are in the pipeline.

He's heard local lenders saying they plan to stop delays in foreclosure processes and complete more of them this year, leading him to believe foreclosures will increase at the rate seen last month.

In DataQuick's previous report in December, foreclosures and default notices in the county fell to their lowest levels in three years. However, industry experts warned not to read too much into that, given the expectations of a shadow inventory of distressed homes and an increase in short sales.

Lily Leung: (619)293-1719;; Twitter @LilyShumLeung