In my March 27, 2007 Part 1 post, I discussed some of the alternatives available to homeowners, including workouts and refinancing. In this Part 2, I will explore other alternatives such as Chapter 13 bankruptcy, litigating in the foreclosure action (i.e., answering the complaint and asserting defenses or counterclaims), and selling your property.

Chapter 13 bankruptcy – This is the traditional way that many homeowners save their home. Under this Chapter of the Bankruptcy Code, you can make a repayment plan to catch up on mortgage arrears over a 3 to 5 year monthly plan and the automatic stay law prevents foreclosure and protects the home. All debts must be included, including taxes, car loans and leases, credit cards, personal and family loans, medical bills etc. Your attorney should be experienced in this area as it is highly specialized and requires knowledge of the many pitfalls that are possible and of the local rules and requirements for each court. In lower New York, there are two Federal Districts, the Eastern and Southern. Where you file depends on where you live: the Eastern District covers Brooklyn, Queens, Long Island, Staten Island and has a court in Brooklyn and another in Central Islip; the Southern District covers Manhattan, Bronx, Rockland and Westchester and has a court in Bowling Green, Manhattan, and in White Plains, Westchester. Filings are all made electronically by attorneys who are registered with the court. The homeowner who files is called the debtor. Those owed money are called creditors, and they are classified as secured if they have some collateral (i.e., a mortgage lien on a home) and unsecured if they do not (i.e., credit card debt). Unsecured debts do not always have to be paid in full at 100% so sometimes Chapter 13 can be a way to keep a home and save money. Whether it makes sense for you will require that your attorney analyze your budget (including recurring expenses and your income) and your liabilities. It is not an easy process and those who try to do it pro se (to represent themselves with no attorney) almost always fail. I have been doing this type of work for nearly 20 years now, having represented lenders and debtors, as well as trustees, and I have never seen a pro se debtor succeed, not even once. I suppose it’s possible, but with your home at stake, why try to save a few thousand dollars on fees and risk losing everything?

Many homeowners try to avoid Chapter 13 because the disclosure requirements and payments over 5 years can be a real hassle. Whether it is the best choice for you is something that your attorney can advise.

Foreclosure Litigation – It is always possible to fight the bank or mortgage company but many people rarely choose this strategy because there is usually no real defense. If the lender has done something wrong – i.e., failed to provide notice of default, wrongfully refused to credit a timely payment, etc. – then there might be a valid defense. Some lenders may have commited a fraud or be responsible for predatory lending, which seems to be the new flavor for homeowners. Others may not have served the summons properly. Whether there is some basis to challenge the suit requires an experience foreclosure litigator’s eye. If there is some way to fight the case, defenses and counterclaims can be asserted in an answer, or the homeowner may be able to file a motion to dismiss. Of course, this depends on timing and the homeowner who waits more than 20 to 30 days after receiving the summons may find him or herself time-barred from taking such action and in default in the case. When you get a summons, call an attorney that day! For those who did wait, all hope is not necessarily lost, as there may be other ways to deal with the case. Sometimes an order to show cause can be filed to seek a temporary restraining order if there is a good reason (perhaps to request a short extension of time to refinance or sell where you only need another week or two). A complete review of litigation procedures and possible defenses is beyond the scope of this posting, as this is intended to just give a broad overview.

Selling Foreclosed Property – For the homeowner who cannot afford to make Chapter 13 payments to catch up on debts, or who does not have enough equity to refinance, and has no defense to the action, selling may make the most sense. There still needs to be enough equity to pay off and satisfy the mortgage and to pay a real estate broker’s commission and closing costs. Many people decide that they simply cannot afford to maintain their present household and that it is time to move and downsize or rent for a while. This is a good strategy for many. If you fall into this category and want to sell, make sure your attorney complies with the new NY law called the Home Equity Theft Prevention Act. This requires certain disclosures in the contract and may actually have the effect of scaring away some buyers as the law gives sellers certain rights to rescind the transaction. I will write about this law in future posts. In addition, the real estate market has gone soft lately so selling has become a little more difficult. As a licensed real estate broker (in addition to being an attorney), I have helped homeowners find buyers quickly. In the land of foreclosure, timing is critical because each month that passes means that you owe more to satisfy the mortgage debt. So, sometimes, it makes sense to cut the price by say $10k now, if it means getting out quickly and avoiding further mortgage debt. The key is to find a cash or preapproved buyer. A buyer who seeks a 45 day mortgage contingency in the contract is an absolute invitation to disaster for the seller in foreclosure.

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All in all, there are several difficult choices faced by New York homeowners in foreclosure. It is best to seek out and rely on experienced counsel when trying to find your way out of the foreclosure minefield. There are often ways out but which direction is best will not always be clear to the layperson.