It amazes me every time I hear from a struggling homeowner in foreclosure that their bankruptcy attorney told them to just let the bank foreclose on the property. This is financially careless and dangerous advice coming from the person they are trusting to give them sound legal advice.
Following are a couple real life examples of why this is such bad advice:
I was referred to a homeowner who used to live here in Denver Colorado. Two years ago he had lost his job and filed bankruptcy. He had to move his family out of state to find employment. The bankruptcy attorney told him to just let the property go back to the bank in foreclosure and not worry about it. Two years later he heard from a different attorney. This attorney represented the HOA for his neighborhood. As it turned out the bank had not even started foreclosure proceedings and as the homeowner he was still responsible for the HOA fees. At this point he had an HOA bill including late fees and attorney’s fees, etc., exceeding $4,000. I listed the property for a short sale. Since the loan on the property was an FHA loan and he had moved out of the property we had to apply for an exception from HUD, which they granted. This type of short sale only allows $1,500 to a junior lien holder but with the $1,000 relocation incentive he is able to apply $2,500 proceeds from the successful short sale closing toward the HOA lien. I negotiated a reduction on the HOA bill and he had to pay the difference of a few hundred dollars. Additionally, we discovered there was a water bill in excess of $2,000. Many water companies still charge fees for a vacant property which benefits from the water/sewer infra structure, drain water, etc., whether there has been any water usage or not. After previously paying the price to discharging his other debts in a bankruptcy, this poor guy owed over $6,000 for bills on a property which he was told by his legal adviser not to worry about. We were able to negotiate the water bill down a few hundred dollars and find a buyer who agreed to pay the remaining balance in the short sale closing. The seller’s credit report will not only show the bankruptcy, but 2 more years of late payments on the mortgage than necessary, which delays his credit recovery time to be able to buy a home again and obtain other types of loans. At least we were able to avoid having a foreclosure on the credit report in addition to everything else. The bank never did begin foreclosure proceedings during this entire period of time.
Another distressed homeowner was referred to me who was in trouble on her primary residence as well as a rental property. She was in the middle of a bankruptcy process when she was referred to me. Her attorney told her she needed to agree to turn the property over to the bank within 9 days after the bankruptcy was done. She was not in a position to find another place to live yet. I explained to her that in Colorado the bank still had to go through the foreclosure process before she could be evicted from the home. We put her property on the market for a short sale. She ended up living in the property rent free for another 6 months while we completed the short sale. She was approved for a Bank of America Cooperative Short Sale, which would have given her a full written release from any deficiency on the mortgage without the bankruptcy and she received $9,000 relocation assistance at the closing table.
Sometimes in rare occasions a bankruptcy may be required for a distressed homeowner to get out from under a load of numerous debts, but never should a property be allowed to go to foreclosure auction without at least attempting to avoid foreclosure.