IowaIowa

How Can I Avoid Debt if I Am Facing Foreclosure?

Authored By: Iowa Legal Aid LSC Funded

Information

Foreclosure of your home can be very stressful. You may be worried about large debt after foreclosure. There are options available to help you avoid debt and possibly keep your home:

  • Modification or refinance of your mortgage and loan:

You should try to modify or refinance your mortgage payments if you are behind in your mortgage payments and want to avoid foreclosure.  When you modify or refinance the loan, you will make a new agreement with your mortgage company.  The new agreement will mean you are no longer behind in your payments. It will help you afford your future payments.

You should talk to a housing counselor about how to do this. There is a free service in Iowa for any homeowner who needs mortgage help. It is “Iowa Mortgage Help” (877.622.4866 or iowamortgagehelp.com). The housing counselors at Iowa Mortgage Help can help you apply to change your mortgage agreement. They are HUD certified and they can help you try to keep your home.

  • Foreclosure and “waiver of deficiency:”

You may not owe any debt in a foreclosure if you do not wish to or can’t keep your home. In Iowa, a mortgage company must file a lawsuit before it can foreclose on a home. The mortgage company “waives” its right to a “deficiency judgment” in most cases.  When the mortgage company waives its right to a deficiency judgment, it will ask the court only for the right to sell the house and get money from the sale of the home. You would not have to pay more on the debt. Most of the time if your home is foreclosed you will owe nothing to the mortgage company.

In most foreclosures, you can request that any foreclosure sale of your home be delayed for at least six months from the date of any judgment against you. Delaying the sale allows you to stay in your home for six months after losing the foreclosure lawsuit.  This additional six months will give you time to either move or try to work something out with your mortgage company. You usually do not have to pay any money for this “delay.” Often you do not owe any money if your home goes to a foreclosure sale.

If you are sued for foreclosure, you should immediately talk to an attorney who can advise you about it. The attorney can let you know exactly what you may owe in the foreclosure and how much time you may stay in your home.

There may be tax on debt that you do not owe after foreclosure. You should get advice from a certified tax preparer or contact Iowa Legal Aid’s Low-Income Tax Clinic about your case.

  • Short sale:

Mortgage companies may offer you other programs to avoid foreclosure of your home. One of these options is a “short sale.” A short sale is when you and your mortgage company agree to let you sell your home for less than what you owe. In a short sale, you are not free from any debt unless your mortgage company agrees to it. If you have more than one mortgage on your home, the other mortgage company would also have to agree to a short sale.

  • Advantages of a short sale:
    • You can avoid foreclosure of your home.
    • You may not owe any more money to your mortgage company (ONLY if your mortgage company agrees).
  • Disadvantages of a short sale: 
    • You may have to give up your home much sooner than waiting through the foreclosure process.
    • You may still owe taxes on any debt that the mortgage company agrees not to collect from you.
    • It can take a lot of time and work to get a short sale agreement AND find someone to buy your home.
  • Deed in Lieu of foreclosure:

A mortgage company may also offer a Deed in Lieu of foreclosure. This is when you give the deed to your home to the mortgage company, and the mortgage company agrees not to foreclose. A mortgage company may require you to try to sell your home before agreeing to a Deed in Lieu of foreclosure. In most Deeds in Lieu cases, the mortgage company will agree not to collect any mortgage debt from you, but not always. It must be clear in the agreement that you are free from any debt.

  • Advantages of a Deed in Lieu:
    • You can avoid foreclosure of your home.
    • You may not owe any more money to your mortgage company (ONLY if your mortgage company agrees).
  • Disadvantages of a Deed in Lieu: 
    • You may have to give up your home much sooner than waiting through the foreclosure process.
    • You may still owe taxes on any debt that the mortgage company agrees not to collect from you.
    • You cannot get a Deed in Lieu if you have more than one mortgage on your home.
    • It can be very difficult to get mortgage companies to agree to a Deed in Lieu.
  • Bankruptcy:

Homeowners often think about bankruptcy as a way to avoid foreclosure. They do not always understand how it will help. There are two basic types of bankruptcy: Chapter 7 and Chapter 13.

Chapter 7 bankruptcy is usually faster and easier than Chapter 13. This type of bankruptcy is only allowed if you do not have enough income to pay your debts through a repayment plan. Chapter 7 bankruptcy can cancel a lot of your debt. Chapter 7 bankruptcy will not cancel mortgage debt and will only delay foreclosure. Your mortgage company may continue to foreclose on your property during this kind of bankruptcy. You may still try to get an agreement with your mortgage company to keep your home.

Chapter 13 bankruptcy is a much longer process than Chapter 7. In Chapter 13, you have to work on a plan to pay your debts. You can also delay any foreclosure on your home, but not stop it all together. Unlike Chapter 7, you can work with your mortgage company to pay off any mortgage debt and save your home from foreclosure during the bankruptcy.

Bankruptcy is a very important decision and it can affect your credit. You should always consult with an attorney to discuss your bankruptcy options.

  • Where to go for help?

You may contact Iowa Mortgage Help 877-622-4866 or iowamortgagehelp.com) for help with mortgage problems. You may also contact Iowa Legal Aid for help with foreclosure and low-income tax problems.

Iowa Legal Aid provides help to low-income Iowans. 
To apply for help from Iowa Legal Aid:call 800-532-1275. 
Iowans age 60 and over, call 800-992-8161 or 
apply online at iowalegalaid.org
 
If Iowa Legal Aid cannot help, look for an attorney on “Find A Lawyer” on the Iowa State Bar Association website iowabar.org.   A private attorney there can talk with you for a fee of $25 for 30 minutes of legal advice.
*As you read this information, remember this article is not a substitute for legal advice. 
Last Review and Update: Feb 23, 2015
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