Stopping Forclosure

How does “foreclosure” work in Colorado?

As a general rule, when you have fallen one month behind in your mortgage payment, you may get a nice reminder but the bank will gladly add the late payment penalty.  Now, if for whatever reason you have missed one monthly payment, it is doubtful that you will have two payments to get completely caught up.  And as you may have discovered, the mortgage servicer wants it all and they want it now.  So the phone calls start.   Daily. 

Month three comes along and you are further behind and have little likelihood of getting caught up, particularly if you haven't been able to catch up two payments.  Because of the various attempts to 'help' the troubled homeowner, the mortgage banks will send you information about mortgage modification and at the same time, will tell you that if you don't pay up, they will send the file to their attorneys.  5 Reasons Banks Don't Want to Modify (PDF)

So now you are at month four and the law firm sends you a letter advising that the file has been turned over to them and before they start the foreclosure, they will give you another month to get all caught up.  Again, if you had that kind of money available, you wouldn't be in this position.   Meanwhile, the bank is stringing you along with the various modification options, losing documentation, denying one type of modification and telling you that you might qualify for a different program. 

At month five (assuming a miracle doesn't occur and the loan get's modified) the law firm will start the legal foreclosure process with the filing with the Public Trustee of your county  a Notice of Election and Demand.  You might think that this is just another 'letter' because it is printed on 8 1/2 x 11” paper but it is much more important that that.  You see, when you borrowed the money from the bank to buy your home or when you refied your mortgage, besides giving the bank your promissory note promising to pay them back, you also signed a Deed of Trust.  In other words you transferred title by way of a deed to the Public Trustee to hold while you made your payments.  (Other states use mortgages so Colorado is somewhat different.  That difference makes the news articles about other foreclosure litigation irrelevant for those of us in Colorado; so don't get confused by them.)   When you have gotten behind on the payments, the bank will tell the Public Trustee (the bank 'elects') to follow through on transferring the property (the bank 'demands' that the Public Trustee do their job and sell the property to pay the note). 

A few years ago the law was changed to require that the sale date be not less than 120 days (i.e.  four months) which brings us to nine months since your last payment.  Now, when the sale takes place you will have to move right after or at least the new owner has the legal right to have you evicted.    The trustee's auction is public and anybody with enough cash can bid on your house and of course the highest bidder wins.  The bank can use any part of or all of your promissory note to bid thus they don't have to come up with cash.  It may turn out that the bank decides to bid only part of the note (because the house may not be worth as much) in which case they are still owed a balance, called a 'deficiency' balance.  Which You Still Owe!  Just because you have lost you house doesn't mean that you don't owe the bank.  Now, the bank doesn't have to collect this deficiency in which case they might forgive the debt which could create tax problems.  The forgiveness of debt is taxable income and you may have to fill out a Form 966 in order to not have to pay more tax.

The banks really don't want your house and more and more frequently they will continue the sale from week to week without selling just because they don't want additional REO (real estate owned)  I have seen cases where the homeowner has remained in the house for over 18 months without having to pay rent or mortgage payments.  Of course, your case will probably be different. 

You could be talked into doing a “short sale” by your friendly realtor which will benefit your realtor but nobody else.  It doesn't really help with your credit nor will it make any difference for the future purchase of a house.  In fact, it may be more detrimental and either a foreclosure or a bankruptcy. Bankrutpcy Mortgage Chart (PDF)

Now, How can bankruptcy help?

In the first instance, the filing of a bankruptcy operates as an automatic stay which immediately stops the foreclosure sale.  This will generally give you a minimum of a couple of months relief before the bank goes through the legal process (called a Motion for Relief from Stay) so they can continue the foreclosure sale.  Chapter 7

In the event that you want to keep your home and have the ability to make monthly payments, you can file a Chapter 13 and propose to catch up the arrears over a 3 to 5 year period while you make your regular monthly payments.  It is also possible to continue with some type of modification process if you qualify. Chapter 13