California residents are able to keep the equity in their homes, even after a foreclosure. However, penalties, fees, and the home’s value can undercut the amount of equity. By filing for Chapter 13 Bankruptcy, homeowners could avoid foreclosure altogether.
What Happens to Home Equity in Foreclosure?
Equity is the total value of your home minus the amount of money you still owe to pay off your mortgage. Equity takes into account the downpayment you provided at purchase, the payments you’ve already made, and the current value of your home.
The part of your mortgage you’ve paid back and any appreciation in the home’s value belongs to you as equity. In the same way, a drop in the value of your home can decrease your equity in your home.
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If you were to sell your home, the portion you still owe to the bank would be taken out of the purchase price. The rest should be legally yours as equity.
Foreclosure and Keeping Your Equity
You don’t forfeit the equity in your property after banks auction off your home in foreclosure. However, once the home is sold at auction, the adverse effects of foreclosure will chip away at that equity before you are paid the remainder.
These are just a few of the factors that will reduce the equity you may recover after a foreclosure:
- The late-payment penalties you’ve already accrued while falling behind on mortgage payments leading up to foreclosure.
- Foreclosure fees. There will be charges for the foreclosure process and your bank will hold you accountable for them. These include legal fees, real estate fees, and even back HOA payments.
- Low home appraisals. Your home could end up worth a lot less than you paid for it. This will reduce your equity.
- Additional liens and second mortgages acquired using the home as collateral. These debts will still be due, and you’ll likely have to use any money left over after a foreclosure to pay them. You may want to check your HELOC status after you have bankruptcy.
The appraisal and sale of your home are all at the discretion of your lender. Your bank will want to get rid of your home as soon as possible. This means they’ll likely accept a low appraisal for the home and often accept below market value from any seller willing to quickly purchase the home.
Can You Sell Your Home to Avoid Foreclosure?
Before you reach a foreclosure deadline you may attempt to sell your home or refinance the loan with another bank. Your current lender may even be willing to restructure your mortgage rather than take losses in foreclosure.
Selling the home allows you a better chance to get the price you want and avoid foreclosure penalties. You’ll have to act quickly though. Your bank will generally notify you of their plans to foreclose on the home about 4 weeks before the deadline. You can continue to work towards selling the home, but closing the sale in 4 weeks might be a challenge.
You could try to sell your home to a “we buy houses” company or i-buyers like Opendoor, but you may not be able to hold out for the best price. The deadline may be tough even when using one of these convenient buyers.
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Alerting your lenders that you are working on selling the home may encourage them to give you extra time. Once the home is sold, you will need to pay back what you owe on your mortgage as well as any penalties for the payments you’ve gotten behind on.
During a time of crisis, like a pandemic, you may also have state or federal rights to ask for forbearance from lenders. This would allow you to take a break from your payments while rebuilding your finances. You must still start repaying all of the money you owe after a forbearance period is over.
Avoiding Foreclosure With a Chapter 13 Bankruptcy
When your financial problems extend beyond late mortgage payments, you may be able to earn an all-encompassing solution to your foreclosure issues through bankruptcy.
Filing for Chapter 13 Bankruptcy can prevent a home from being foreclosed on and provide some protection from your creditors. You work with the court to establish a three to five-year payment plan to pay back an agreed-upon amount of your debt. At the end of your payments, you would receive a “discharge” from any qualifying remaining debt.
A Chapter 13 Bankruptcy would likely still leave you with mortgage payments once you were through. However, you would be able to keep your home, and other debt like a “second mortgage” might be completely wiped away. It’s important to discuss this option with a skilled Los Angeles Chapter 13 Bankruptcy attorney to determine if it’s right for you and your family.
Avoiding Foreclosure With a Chapter 7 Bankruptcy
Generally, filing for Chapter 7 Bankruptcy will only delay your foreclosure, but won’t allow you to avoid it. You can earn some shelter from creditors over several months with the “automatic stay” granted during the Chapter 7 process.
Keep in mind, your lenders can ask the bankruptcy court to allow them to proceed with a foreclosure during bankruptcy. The lender may also decide to wait until you emerge from bankruptcy to auction off your home.
Claiming Surplus Equity Funds After a Foreclosure
In a good real estate market for sellers, there is a chance your house will sell for more than the balance of your remaining mortgage.
In this circumstance, the former homeowner would be entitled to the additional equity earned in the sale. If you have a claim for surplus money, it’s critical to get your claim filed as soon as possible. There is a limited deadline to file this sort of claim.
You’ll likely need the help of an attorney to handle the complex paperwork and timing involved in these cases. If you don’t file in time and file the correct paperwork, the court could end up with your surplus money.
Contact a Bankruptcy Attorney Serving Southern California
If you are facing a foreclosure on your home, bankruptcy could provide a lifeline you hadn’t considered. When foreclosure can’t be avoided, a Chapter 13 Bankruptcy might provide a viable solution to all of your financial issues and allow you to keep the keys to your front door.
When you are facing losing your home you should contact the Law Offices of Steers & Associates for a free bankruptcy consultation. Our highly-regarded Los Angeles Bankruptcy Legal Team will go over your options with you and clearly explain the advantages of each different path.
Elena Steers is a highly experienced bankruptcy attorney, the founder of Law Offices of Steers & Associates, and previously worked as a Bankruptcy Trustee Assistant at the Office of the Chapter 13 Trustee in Los Angeles. Her current affiliations include the State Bar of California, National Association of Consumer Bankruptcy Attorneys, and Central District Consumer Bankruptcy Attorneys Association.