Foreclosure is a legal proceeding that ends a borrower's interest in real property because the borrower has failed to make timely mortgage payments or pay property taxes.

The existence/history of a serious health condition with unexpectedly high medical expenses and/or a reduction in income may be useful in negotiating a deal with a bank if you can find a sympathetic person (bankers are people too!). However, these facts are not defenses that will stop a foreclosure. Still, if you live in a state in which foreclosure involves a judge, it is worth letting the court know about your condition. It may make the judge lean more on your side for issues over which he or she has discretion.

As soon as you think you may miss a payment or cannot pay your property taxes, take the following steps: 

• Review Survivorship A to Z's information on what to do in the event of a financial crunch to see if you have alternatives that will help keep mortgage payments to date.
• Contact your bank to alert it about your health and attendant financial situation and to find out if it has a program to revise your mortgage. Keep in mind that any reductions are generally made up at the end of the loan. 
• Consider whether you can refinance your mortgage or apply for an FHASecure loan. Avoid lenders who charge excessive interest rates or closing costs. There are better alternatives. 
• If you are age 62 or older, consider taking out a reverse mortgage to pay off the outstanding debt.
• Consider contacting a free or low cost credit counselor. For information about finding a reliable one, click here.

If it appears you are headed toward foreclosure: 

• Learn about foreclosure prevention options in your state. State resources and HUD programs may be able to help. To find resources in your state, see: http://www.hud.gov/foreclosure/local.cfm  
• Know your mortgage rights. It's in your best interest to know everything you can about your mortgage and the rights you have under the legal document. Read the fine print. 
• Consider contacting an experienced real estate lawyer or a HUD approved housing counselor for assistance in working through the best option for you, and then negotiating for you. HUD counselors are free. 
• Know your rights against unscrupulous brokers or banks. Check your state's law to find out if there is a civil action for abuse of a vulnerable person by unscrupulous brokers or banks. These laws allow for treble damages, including payment for emotional distress, plus attorneys' fees. Usually these laws apply to people over age 65 and to people who meet a definition of "disability." If you don't qualify because of age, you may be able to qualify because of your health condition. In addition to your physical physical condition, mental conditions such as depression may count as a disabling condition. 
• Give legal documents your utmost attention. If you receive legal documents, read them carefully or take them to your lawyer or a legal services lawyer. You only have a short time to answer legal papers. Your answer may delay the foreclosure action to give you time to resolve the problem. If you ignore the documents, your house could be sold against your will in as little as two months depending on the laws of your state. 
• Consider alternatives such as:
  • A "short sale."
  • Handing over a deed in lieu of foreclosure.
  • Filing for bankruptcy. (A bankruptcy court cannot modify the terms of a mortgage because of federal law).

If a foreclosure action is started against you:

• Do not ignore any legal documents you receive. 
• Contact the bank immediately to try to work out a solution. 
• Find out how much time you have to stay in the property. 
• Make alternate plans to leave the property, if necessary.
• Read our information about foreclosure. Click here.

Special Notes: 

• If you receive annoying phone calls from your bank, you can insist that contact be in writing instead of phone calls. A creditor is limited on the contact they can make with you. Keep a record of all conversations. For more information see: http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre18.shtm  
• If a bank forgives a debt, the amount that is forgiven is considered to be income for tax purposes. If the home is your primary residence, you may avoid having to pay tax on the income. 
• Watch for scams. For example, avoid foreclosure prevention companies that promise they can stop foreclosure immediately if you sign a document. You may be turning over your property and becoming a renter. Also avoid companies that promise to save your home for a small fee. You don't need to pay fees for foreclosure help. Do not pay fees to negotiate with your bank. You can do it yourself or call a HUD approved housing counselor for help. (To find a nearby HUD approved counselor, click here .)
• Members of the military and veterans have special rights regarding mortgage interest and foreclosure thanks to the Servicemembers Civil Relief Act. To learn more, see: http://www.homeloans.va.gov/veteran.htm

Keep in mind: Though your home is important to you, your health and your family are more important. If the only way you can avoid foreclosure is to use all your assets, you may be better off letting go of your house and renting until you get on your feet again.

• FHA Secure
• Contacting Your Bank About Modifying Your Mortgage  
• How To Get Rid Of The Debt Other Than Through Foreclosure  
  
• Foreclosure And Taxes  
  
• What To Do If A Foreclosure Action Is Started Against You  
  
• Your Credit Situation After Foreclosure  
  
• Free Expert Advice For People Who Face Foreclosure  
  

FHASecure is a refinancing option that gives homeowners with non-FHA adjustable rate mortgages (ARMs), current or delinquent, and regardless of reset status, the ability to refinance into a FHA-insured mortgage. With FHASecure, the bank will not automatically disqualify you because you are delinquent on your loan, and the bank may offer you a second mortgage to make up the difference between the value of your property and what you owe.

So long as you are current on your mortgage and have sufficient income to make the mortgage payment, you are eligible for an FHASecure refinance.

If you are delinquent on your mortgage payments, the default must have been due to the payment shock of an interest rate reset or, in the case of an Option ARM, the "recasting" of the mortgage to fully amortizing.

By refinancing into a FHA-insured mortgage, you can expect to pay lower monthly mortgage payments.

The key is to come up with an alternative that is better from the bank's point of view than letting the foreclosure continue.

Banks may consider one of the following alternatives to modify a loan that would otherwise go into default: 

• Forbearance Agreement: 
• • You pay extra per month to catch up for the money owed - in some cases up to a two year maximum. 
  • The bank may agree to a forbearance for up to 18 months during which you pay nothing or reduced payments. Repayment occurs later.
• Modification Agreement: 
• • The interest rate of your loan may be reduced and/or the arrears you owe may be added to the amount due to extend the terms of the loan and make monthly payments more affordable.

Calling before there is a problem lets the bank know you are a responsible homeowner who wants to do the right thing. This is a good time to let the bank know about your health condition, attendant expenses and resulting decrease in your income.

When you talk to the bank, keep a written log of whom you speak to, when and what you discuss. Follow up regularly with the people you speak to if they do not send you the information or forms that you need. Some banks are very large and you are only one person of many accounts that they handle. If you are persistent, honest, courteous and professional, you have a better chance of reaching a solution.

Some banks will tell you to talk only to their lawyers. If you don't have or can't afford a lawyer, you can talk to the bank's lawyer yourself. Remember, you have the right to be treated courteously and taken seriously. The lawyer is not your enemy and is only trying to do the work the bank requests.

Keep in mind that banks don't want your home. They want to recoup their investment. If you think creatively, you may be able to work out a payment arrangement that works for both parties.   

There are several ways to get rid of your debt without foreclosure. Note: all alternatives, other than bankruptcy, require the bank's agreement. 

• Short Sale 
• Signing over the deed to the bank (Deed in Lieu of Foreclosure) 
• Reverse Mortgage 
• Bankruptcy

To learn more about these subjects, see the article in "To Learn More."

If any part of your debt is forgiven as part of a loan modification, short sale, deed in lieu of foreclosure or a foreclosure sale, you would normally have to consider the amount forgiven taxable income. However, as long as you used the debt to buy, build or improve your primary home, you don't have to pay tax on the forgiven debt.

The amount of the forgiven debt will be reported to the government via Form 1099-C. The bank will send you a copy. Call the bank if you don't receive the form by the end of the succeeding February.

You, the taxpayer, report the cancellation of debt on Form 982. (NOTE: reporting the cancellation does not make it taxable. Whether it is taxable or not depends on the circumstances as noted above).

Do not ignore any legal documents you receive. 

• Take any legal documents to a lawyer to review immediately on receipt. There are deadlines that can affect your case if they are missed. If you cannot afford a lawyer, call your local Legal Services office and ask if they have attorneys who can help you or call your local Bar Association and ask if they have any lawyers who will give you free advice. 
• If you cannot get any legal advice, at the very least, write a letter to the lawyer who sent you the legal documents. The name of the firm should be on the legal documents you received. Tell the lawyer about your health problem and your ability to work out a financial solution. If you do not agree with something in the legal documents or with something that the bank has done, put that in the letter as well. Consider filing this letter with the County Clerk's office where the foreclosure action is filed or sending a copy to the judge assigned to the action so they will be aware of your position.

Contact the bank immediately to try to work out a solution.

• If you do not have a lawyer representing you, do not delay in contacting the bank to work out a solution. The longer you wait, the less incentive the bank will have to work with you. The closer to the foreclosure sale that the bank gets, the more attorneys' fees they will have paid and the more difficult it will be to work out a solution.
• In some states, the bank may be required by the Court to give you an opportunity to work out a payment plan if the mortgage on your home has: 
  • A high interest rate OR
  • You had high closing costs at the closing of the mortgage OR  
  • The mortgage requires interest only payments.
• If the bank is unreasonable and will not work with you, contact a lawyer or call the court clerk for advice.
• When you talk to the bank, keep a written log of whom you speak to, when and what you discuss. Follow up regularly with the people you speak to if they do not send you information or forms that you need. Some banks are very large and you are only one person of many accounts that they handle. If you are persistent, honest, courteous and professional, you have a better chance of reaching a solution. Some banks will tell you to talk only to their lawyers.

If you promise to provide the bank with financial information or a payment, do not break this promise. If you cannot meet this promise, call the bank and explain why. If the bank does not hear from you, they will assume you are avoiding the problem and they will proceed with the foreclosure.

Consider some of the solutions in the article, Getting Rid Of The Debt Other Than Through Foreclosure

Find out how much time you have to stay in the property. 

• Ask any lawyer you call for advice about the foreclosure action how long you can expect to be able to remain in your property if you cannot solve the problem. The amount of time varies from about 2 months to a year depending on the state. This information will tell you how much time you have to solve the problem or make alternate plans.
• Call the bank's lawyers from time to time to find out where the foreclosure stands so you can plan how much time you have. Some law offices handle many cases and you may have trouble reaching someone. Continue to be persistent and courteous and you will get the information you need.

Make alternate plans to leave the property, if necessary. 

• If you cannot settle the matter with the bank, make other plans for someplace to live so that you are prepared when you are required to leave. No matter how important your residence is to you, ultimately, it is only walls and ceilings. Your health and well-being should be your first concern.
• Having an alternate plan in place early will help reduce the stress you feel in a difficult situation.
• If you wait till the last minute, you may be forced into a difficult and undesirable living situation. 

Expect that the bank will report a foreclosure, short sale or deed in lieu of foreclosure to the credit bureaus. The report will read "settled." That means you agreed to settle the debt for less than you owed. This stays on your credit report for 7 years.

The effects of the foreclosure are reduced as time goes on. You may be able to get another mortgage 5 years after discharge. Some government loan agencies currently require only 3 years if there were extenuating circumstances or hardship. Depending upon the down payment, there may also be programs available that require only 1-2 years after a foreclosure.

To learn more, see:

• Credit: Getting, Keeping, Fixing
• Credit Scores

HUD approved housing counselors will help you understand the law and available options, including how long you can expect to remain in your home. Their advice is free. HUD approved counselors can also represent you in negotiations with your bank. They can even help review your finances to see if you can make them better.

You can find a HUD approved housing counselor in your area via www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm or through Hope Now at 888.995.4673.

Also consider contacting a free or low cost Credit Counselor who can help with respect to your remaining debt. 

Editing and Additional Information by: 

Jennifer M.S. Byrne, Esq., Counsel 
Hiscock&Barclay, LLP 
Syracuse, NY