Bankruptcy may be best solution when facing foreclosure.

As interest rates have gone up, mortgage delinquencies and foreclosures have risen as well. This has brought out the vultures.

An article in the Wall Street Journal (5/30/06) details two businesses that feed on the misfortune of others.

In one business, investors look for people whose house is in foreclosure or heading for foreclosure and offer to buy the house for far less than its actual market value. They do this only if the market value of the house is far greater than the mortgage and they think they can turn the house around for a profit. They tell the owners that they will do better selling at a discount than they would letting the foreclosure proceed.

This could be true, but depending on the offer and the nature of foreclosure laws in your state, it might also be false. People in this business try to make $100k or more on each deal.

The other vulture investors ask desperate owners to assign the title over to them. They then rent the house back to the owner. They promise to make payments on the mortgage (or pay it off), forestalling the foreclosure, and to sell the house back at a preagreed price when the owner’s financial situation improves.

The primary problem is that these people simply do not keep their end of the bargain. Sometimes they simply do not pay off the mortgage and the house is foreclosed anyway, for example. Seldom does everything go as planned.

If you find yourself in arears on your mortgage, the first thing to do is talk to your bank. They hate to foreclose and are usually willing to make an active effort to find some way to refinance the house or postpone payments.

If this does not work, the next thing to look at is bankruptcy. If your house is worth more than your mortgage you may be able to save your equity and stay in the house by wiping out your other debts, giving you enough money to make mortgage payments.

Different states have different limits but most states’ laws protect homeowners from losing their homes or the equity in their homes.

If your house is “under water” — that is the mortgage is higher than the value of the house — then bankrupcty won’t save your house but it could save you from having to pay the balance of the mortage that is due once the bank has forcelosed and sold your house.

I know a couple who have filed bankrupcty twice in the last decade, once for her and once for him, and they still live in the same house they had at the beginning, with all the equity they had built up intact.

More information on bankruptcy is in our archive under Bankruptcy.

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