Strategies for Dealing with Foreclosure

With the current national and local economic downturn, Colorado homeowners continue to be threatened with the prospect of losing their homes through foreclosure. In the unfortunate event that you are facing foreclosure, you may have several options to pursue both before and after the process begins. This article discusses pre- and post-foreclosure strategies and options for preventing you from losing your home. First, we will highlight the Colorado foreclosure process.

The Foreclosure Process

In 2008, Colorado adopted significant changes to the foreclosure process. Colorado foreclosures occur through both in-court and out-of-court proceedings. The most common process is managed by a public trustee out-of-court and takes about four months. The out-of-court foreclosure process begins when a lender files the appropriate documents with the public trustee to request a sale of the property. Once the public trustee officially records the foreclosure action, a foreclosure sale can be scheduled.

After the sale is scheduled, the lender still has to obtain a separate court order allowing the sale. The court schedules a hearing to consider the matter, and all affected parties are notified. If no one contests that the borrower is in default, the court allows the sale without a hearing.

If the borrower plans to pay off the default and stop the foreclosure, he or she needs to submit the intention to do this to the public trustee at least 15 days before the sale. If this is done, the borrower can pay off the default and discontinue the foreclosure process up until noon the day before the sale.

The public trustee schedules the sale 110-125 days after the initial foreclosure action was recorded. The notice of sale is published in a local newspaper for 12 weeks. The public trustee also mails a copy of the notice to the borrower.

The public trustee typically conducts the sale at the courthouse. At the sale, the public trustee reads the written bid submitted by the lender, and any party may bid. If anyone other than the lender is the winning bidder, that person must deliver the bid amount in cash or cashier’s check to the public trustee. The winning bidder is given a certificate of purchase.

There is no longer any redemption period for the previous owner after a foreclosure sale in Colorado.

Preventing Foreclosure Process from Beginning

Homeowners should take all necessary steps to prevent a lender from filing a formal foreclosure action. As might be expected, once the foreclosure action begins, odds increase that the homeowner will ultimately lose their home. Fortunately, several pre-foreclosure strategies can be pursued with lenders to prevent a foreclosure from occurring.

Special Forbearance – Your lender may be able to arrange a repayment plan based on your financial situation and may even provide for a temporary reduction or suspension of your payments. Sometimes a lender may offer to work out a repayment plan--one that includes your regular monthly payments plus a fraction of what you have missed, until you are all caught up. You may qualify for this if you have recently experienced a reduction in income or an increase in living expenses.

Mortgage Modification – You may be able to refinance the debt and/or extend the term of your mortgage loan. This may help you catch up by reducing the monthly payments to a more affordable level.

Short Sale - If your home is worth less than the amount you owe, you might be a candidate for a short sale. A short sale affects credit but it's not as bad as a foreclosure. You or your agent will need to negotiate with your lender to find out if the lender will cooperate on a short sale.

FHA Assistance – If you have a Federal Housing Administration (FHA) mortgage, your lender may be able to work with you to obtain a one-time payment from the FHA insurance fund to bring your mortgage current.

For additional information about preventing a pending foreclosure, contact the Colorado Foreclosure Hotline at 1-877-601-HOPE or www.coloradoforeclosurehotline.org.

Steps You can Take after the Foreclosure Action Begins

After the foreclosure action begins, a homeowner’s options are limited, but there are still things that can be done to save the home or prevent the sale from occurring.

Sell the Home – If there is equity in the home, you may seek to sell the home before the foreclosure sale takes place. To halt the foreclosure action, the sale price must yield the outstanding amount owed on the home, plus all of the fees and costs the lender has incurred thus far in the foreclosure proceeding (i.e. court costs, attorney fees, default interest, etc.). Unfortunately, most homeowners in foreclosure do not have equity in their property, and thus, a sale would come up short paying off the underlying debt.

Contest the Validity of the Default – If you believe that you have made all of your payments on time, and that the default is a mistake, you should retain an attorney to contest the lender’s notice of default and subsequent foreclosure proceeding.

This must be done within the first few weeks of when the property is put in foreclosure.

Sign a Deed-in-Lieu of Foreclosure - This is called deeding the home back to the lender. The homeowner gives the lender a properly prepared and notarized deed, and the lender forgives the mortgage, effectively canceling the foreclosure action. This would have the affect of minimizing the legal fees and costs the lender would have to incur if it proceeded through the sale date. If you pursue this option, seek to negotiate with the lender that your credit not be negatively affected, as would have been the case if the property were foreclosed upon.

File for Bankruptcy - If all else fails, you may wish to consider filing a Chapter 13 bankruptcy. In fact, many people file for Chapter 13 bankruptcy specifically to stop foreclosure. In most cases, an automatic stay is entered as soon as a Chapter 13 bankruptcy petition is filed. The automatic stay will temporarily stop foreclosure, along with all other collection action, regardless of the stage of the foreclosure proceedings. With the automatic stay in place, the debtor and his attorney have the breathing room to work out a Chapter 13 repayment plan.

In summary, don’t wait until your home is in foreclosure to begin weighing your options. If you are having trouble making your mortgage payments, contact the lender immediately and attempt to negotiate a loan modification or forbearance. If you are uncomfortable doing this on your own, retain an attorney or contact a foreclosure counselor. Once the foreclosure process begins, it may be wise to retain an attorney to either contest the validity of the default or to file a Chapter 13 bankruptcy.

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About the Author: Eric L. Nesbitt is a Colorado real estate attorney and business attorney who has been practicing law since 1991. He is licensed to practice as a business and real estate lawyer in both Colorado and Illinois. During his 18 year legal career, he has focused on real estate and business law matters. He has represented clients on the most complex of real estate transactions, but is equally comfortable representing clients on small residential transactions. In addition to being a real estate attorney, Mr. Nesbitt is a Colorado licensed real estate broker, and operates the commercial brokerage firm The Nesbitt Group.