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How To Get Rid Of Mortgage Debt Other Than Through Foreclosure


There are several ways to get rid of your debt without foreclosure. The alternatives are as follows. Note that each alternative other than bankruptcy requires the consent of the lender.:

Short Sale

A short sale is a sale of the property that results in the bank agreeing to accept less than the total amount due. The bank may agree to such a sale because the value of the property is less than what is due to the bank and they will not be able to recoup any more by going through a foreclosure.

The bank may ask that all parties affected by the sale, (you, real estate agents, other creditors), take a discount along with the bank.

You will likely need to prove you are suffering a financial hardship or that your property is worth less than the mortgage. The fact of your health condition may help. 

It takes a lot of effort to get a bank to agree to a short sale.Experience indicates that it is best to have an experienced person assist in the negotiations. For instance, a lawyer, a financial planner or a foreclosure rescue company. There are also nonprofit groups that can help. One alternative to help you find a solution or to engage a professional is to contact the nonprofit organization HOPE Now (888.995.4673), a counseling service backed by the White House. (For information about finding a lawyer who works for a reduced fee or for free, click here.)

Signing over the deed to the bank (Deed in Lieu of Foreclosure)

A "Deed in Lieu of Foreclosure" involves literally signing over the deed to your home to the bank which will often, in turn, forgive the balance of the debt you owe to the bank. 

One of the advantages of a Deed In Lieu of Foreclosure is that it avoids the public notoriety of a foreclosure proceeding. You may also receive more generous terms than you would in a formal foreclosure including the wiping out of the debt that is due to the bank. 

A Deed In Lieu of Foreclosure saves the bank the expense and time involved in foreclosing. The downside from the bank's point of view is it still has to sell the property. Remember: banks don't want to own homes. 

Don't be surprised if the bank demands that you try to sell the home before agreeing to a Deed In Lieu of Foreclosure or that you pay some cash at the closing or that you sign a promissory note agreeing to pay in the future. If you agree to try to sell the home, hire a real estate agent immediately and impress upon them how important it is to sell the property for the best possible price in the shortest possible time. Contact the real estate agent frequently to see what she or he is doing to sell the property. Keep in constant contact with the bank to report progress on the sale. 

Reverse Mortgage

If you are age 62 or over, you can convert your equity in your home into cash without having to sell your home or take on a new monthly mortgage payment. You can receive the cash as a monthly stream of income, a batch of cash, or a line of credit. To learn more, see: Reverse Mortgages 101


Bankruptcy gives people a second chance. Our forefathers thought it was so important, they built it into the constitution. 

Filing for bankruptcy temporarily stops any foreclosure or collection lawsuit. In Chapter 7 bankruptcy, most of your assets are used to pay your debts. You are allowed to keep some assets. Whatever debt is left is discharged and cannot be collected by creditors. A mortgage on your home cannot be discharged. However, discharging your other debts may free up money to pay your mortgage. 

In Chapter 13 bankruptcy, a plan is set up to repay your debts over a 3 to 5 year period. Most debts are discharged at the end of the period (except debts such as taxes, child support and student loans). Again, most mortgages will not fit in a Chapter 13 plan, but the plan may free up money so you can pay your mortgage. 

In any bankruptcy, it is very important to do everything that the bankruptcy court requires you to do, if you can. If you do not do so, your bankruptcy may be dismissed. The rules for filing for bankruptcy relief are strict and you may not be allowed to file for relief again for a period of time. 

While a bankruptcy will either discharge your debts or will give you a plan to pay them, it may not completely stop the bank from proceeding with a foreclosure action. If you do not free up enough money after filing for bankruptcy to pay your mortgage or if you do not do everything that the bankruptcy court requires, the bank may ask for a court order allowing them to complete the foreclosure of your home. 

If the bank proceeds with the foreclosure after you file for bankruptcy, consider staying in the home through foreclosure action. You may even be able to stay in it for a while after it has been sold until the bank goes through legal proceedings to get you out. 

Due to federal law, a bankruptcy court cannot modify the terms of a mortgage (even though it can modify the terms of other debt). 

Editing and Additional Information by: 

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

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