If you have ever been served with paperwork to foreclose on your home or other real property such as a commercial building or rental property, you know that it can be one of the most stressful events imaginable. However, that stress can be alleviated by understanding the foreclosure process and what your options are. To that end, I have put together answers to several frequently asked questions by persons facing foreclosure in Wisconsin.
Q: What should I expect? How does the foreclosure process work?
The bank or other mortgage note holder will initiate the foreclosure by serving a document called a Foreclosure Summons and Complaint (“the Foreclosure S&C”) on you and filing it with the Wisconsin Circuit Court.
If you wish to contest the foreclosure action, you must file an Answer with the Court within twenty (20) days of being personally served. Otherwise, the bank will get what it is seeking by default.
The Foreclosure S&C will indicate whether the bank is seeking a deficiency judgment against you, i.e., whether the bank will seek a money judgment against you for the difference between what you owe and what the real property sells for at the sheriff’s sale, if applicable. If there is a deficiency and the bank elects to waive it, there may be tax consequences, as forgiven debt is treated as income. However, a federal law, the 2007 Mortgage Debt Forgiveness Relief Act, currently provides tax relief to certain homeowners whose primary home is foreclosed. The Act expired in 2013 but was renewed in 2015 and is currently set to expire again at the end of 2016.
This Foreclosure S&C will also tell you what redemption period the bank is seeking. The redemption period is the time between when the Court issues a judgment and when the bank is first allowed to hold the sheriff’s sale and auction off the real property. The redemption period may run anywhere from five weeks for an abandoned property to twelve months for a primary residence where a deficiency judgment is being sought. The bank frequently chooses to waive seeking a deficiency judgment in order to be allowed to pursue a shorter redemption period. Frequently, for example, the bank elects to waive a deficiency judgment on a primary residence, in which case there is normally a six month redemption period. During this redemption period, you have the right to continue to live in your home or to rent it out.
After the property is sold at an auction, a hearing to confirm the sale will be held before the Court. If you are not out after the Court confirms the sale, the new owner of the property may start an eviction case to forcibly remove you.
Q: What are my options to avoid foreclosure and keep my home?
All of these options are available to you until the sheriff sale occurs. After the sheriff sale occurs and is confirmed, the foreclosure is final and – for all practical purposes – irreversible.
First, you have the absolute right to keep your home if you pay the reinstatement amount. The reinstatement amount consists of all the payments you are behind on your mortgage, late fees, interest, and court costs and attorney’s fees incurred.
Second, you may be able to negotiate a loan modification. The bank may be willing to wrap your arrears into the principle of your mortgage note, reduce interest rates, extend the life of your loan, or (in rare cases) reduce the principle. The goal is to have a new monthly payment that the homeowner can afford while still paying enough to keep the bank satisfied that it’s a better option than foreclosure.
Third, a Chapter 13 bankruptcy is an option for homeowners who want to keep their home. The arrears (payments you are behind on, late fees, etc.) along with other dischargeable debt can be included in a Chapter 13 bankruptcy plan, meaning that the bankruptcy court will order you to pay a portion of the debt over a set period and the rest will be discharged. The remaining normal monthly payments on your mortgage are not included in a Chapter 13 bankruptcy, which means that you have to be able to afford your normal mortgage payment going forward in addition to the monthly Chapter 13 payment. If you qualify for a Chapter 13 bankruptcy, it puts an absolute stop to the foreclosure action.
Q: What are my options to avoid foreclosure but let my house go?
Again, all these options are available to you until the sheriff sale occurs.
First, you may be able to sell your home. If you can only sell it for less than you owe on your mortgage note, it is called a “short sale,” and requires the bank’s approval. The bank should agree to forgive the difference if your home sells for less than you owe, which may count as taxable income. Sometimes the bank will try to get you to sign a promissory note for the difference – which may make the foreclosure a more attractive option for you.
Second, the bank may agree to do a deed-in-lieu of foreclosure, meaning the bank may agree to not foreclose on your home if you simply hand the title to your home back over to them instead. A deed-in-lieu of foreclose is very similar to a short sale insomuch as the bank should agree to forgive the difference if the fair market value of the home is less than you owe on it, but occasionally the bank will try to get you to sign a promissory note. In the case of either a short sale or a deed-in-lieu, make sure you review your paperwork carefully for whether the deficiency, if applicable, is being forgiven.
Third, you could file a Chapter 7 bankruptcy and discharge your mortgage note. The bank would then be able to take the property back as part of the bankruptcy action.
Q: How is this all going to affect my credit report?
A foreclosure stays on your credit report for seven years. A bankruptcy will stay on your credit report for ten years. Any forgiven debt in a short sale or deed-in-lieu of foreclosure will show up on your credit report as a charge-off and will stay on there for seven years.
Q: Which option should I choose?
This is ultimately a question you must answer for yourself. It depends on your specific circumstances and goals. I encourage you to speak with a lawyer here at Wagner, Falconer & Judd and, in appropriate cases, also speak with a tax accountant before making a decision.