Foreclosures – What are your Options?

Source: West Coast Woman, 2007
Everyone from small business people to manufacturers, truckers, builders, laborers, realtors, mtg broker, homeowners, renters and investors are affected as a result of the downturn in the home building industry.
There are a few alternatives available to avoid defaults and Bankruptcy. I will share with you my experience and provide some examples.  When an alternative is not available, Bankruptcy may be the answer after weighing all the options under the law.
Many debtors are served a summons when the foreclosure process begins. Typically the defendant has 20 days to answer the summons. If the debtor can answer the summons or hire someone to answer it for them, as opposed to ignoring the summons, this can buy them 30-90 days before the process starts again. Depending on the economy and collection law firm, it may buy the homeowner a year or more. Often times, the debtor is temporarily experiencing a set back and can borrow the funds from a friend or family member to get caught up on their mortgage.  Sometimes the debtor is waiting on a refinancing possibility or a pending sale of their home. Answering the summons affords the debtor time to weigh their options and think of possible solutions.
A chapter 13 Bankruptcy will allow the debtor to pay the arrearage on their mortgage over a period of 3 –5 years. However, two important changes under the Bankruptcy Reform Act may have an impact.  If a debtor has lived here 2 years they quality for Florida exemptions. If they have acquired their homestead within 1215 days they are entitled up to 125K equity in their homestead. If they have acquired that property before that or transferred the funds from a previous home within Florida, all the equity is exempt. This was Congress’s way of closing the mansion loophole. So the time, in which the debtor acquired the property, when they became a resident of Florida and how much equity is in the home are important questions to answer.
When a debtor owns more than one property it is important to look at when they purchased the properties and the amount of equity in each property. The debtor may consider moving into a home with the most equity under Florida law and claim it as their homestead.  The homes that have little or no equity can be surrendered in the Bankruptcy process and the deficiency amount discharged. This is easier than it sounds. Most folks are not only financially invested in their homes, but psychologically and emotionally as well.
Now the question becomes – what if the debtor is unable to save their homestead or one of their investment properties? When do they stop making payments? In other words, if there is not any equity in the home is it wise to try to hold on to the home?  Many of my conversations lately focus in when it is time to fish or cut bait. People are very attached to their home and it is painful to conceive the thought of giving it up. It breaks my heart when I see people go through their entire savings and retirement funds to save their home if it is not worth saving. A lot of debtors are not aware of what assets are exempt under Florida Law. The more information a debtor has, the better able they are to weigh their options before it is too late. Timing is extremely important. For example, most Retirement funds are exempt under Florida law and protected assets. The debtor who is unable to make their mortgage payments and know foreclosure is around the corner; have to ask themselves if it is worth pouring water into a sinking ship? It does not make sense for debtors to drain assets, such as retirement accounts, if they are exempt under Florida law.
This is much easier said than done. Many people are concerned when they will have to be out of their house. They need time to save up for rent, first and last months security deposit. Reverting back to my prior option, by answering their summons they can buy time to save up this money and scout around for a rental. The good news is rental prices are extremely reasonable now.
The same line of thinking goes for small business owners. Many in our area are suffering the after effect of the hurricane season. They rebuilt their business and in the meantime lived off of credit cards in hopes their business would come back.  Likewise, builders, contractors, carpenters, construction workers have to ask themselves the same tough questions-How far do I go to try to save my business? It is a difficult decision.  They are often at a loss of what to do with their inventory, suppliers, vendors, customers, etc.  Business owners need to know when to close their doors, notify their suppliers, vendors, customers, landlord, etc. Often times a Bankruptcy is the best alternative and an attorney can help guide the business owner through this difficult process.
Many people in Florida invest in multiple properties. Investors are now finding it difficult to rent their properties, close on their properties and flip them.  I often hear, “All of my properties except one or two are doing very well.  If I can just hang on until it sells…” Other times the investor is sickened to hear their builder or contractor has gone belly up. Going back to the Fl. homestead exemption. There are situations where the investor may opt to move into the home that has the most equity and make it their homestead. Once again there are numerous things to take into consideration in weighing whether or not this is desirable and feasible.
My experience has been that mortgage lenders are not doing short sales or deeds in lieu of foreclosures like they used to. These strategies seem to be a thing of the past. Many of my clients complain that their mortgage lenders will not work with them or even talk to them when they are struggling financially.
Bottom line – there are times when a person has to bite the bullet and file a bankruptcy. Nobody wakes up to the day looking forward to utilizing this last resort. Bad things can happen to good people and there is a remedy. It is our right to file Bankruptcy under our Nation’s laws. I would like to point out that Chapter 7 and 13 bankruptcy filings in our Middle District of Florida for the months of January through April have almost doubled.  Last year’s year to date total (YTD) Middle District Bankruptcy filings January thru April was 4223, this YTD total January through April is 7261. My educated guess is that this could be for a few reasons.

  1. Due to the number of foreclosures.
  2. There was a natural lull in January and February of 2006 because so many debtors filed before the Bankruptcy reform act was passed in October of 2005.
  3. Many debtors were unaware that filing a bankruptcy was still an option.

Based on all the people that I have met with, the real estate market and foreclosure proceedings are currently responsible for the majority of debtor has to file. Furthermore, Sarasota Clerk of Court foreclosure numbers have tripled since last year. In March of this year, the Sarasota Clerk of Circuit court processed 98 foreclosures as compared with 26 for the same period a year ago. Effective May 1, 2007 the Clerk’s web site will offer a calendar of scheduled foreclosure sales with a link to the case docket under the “What’s New” section of the clerk’s homepage.  The calendar will list all schedules sales by day and allow the user to navigate to the case docket information. This is another helpful tool homeowners can use to find out how much time they have to file a Bankruptcy before the sale of their home. Often time’s debtors have no idea when the actual sale will happen and they feel lost, scared and confused in the process. The mortgage lenders will not talk them and the debtor’s don’t know where to turn. Now they can simply go to the Karen Rushing’s Clerk of Circuit Court or go on line for the information.

Sherry Ellis Law, PLLC