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Go from Upside Down to Right Side Up (Part III): Foreclosure & Alternatives

In Part I of this article we discussed Loan Modifications and Payment Plans.  In Part II of this article we discussed Sales and Short Sales.  Let’s now move on to Foreclosure and Deeds in Lieu of Foreclosure.

Foreclosure is an action of last resort for banks.  They don’t want to do it – it can only make them lose money.  But they will do it if they think they’ll lose more money otherwise.  If you have gone through their loan modification process and they did not approve you, that’s a sign they don’t have faith that you can pay them even a reduced amount.  Then you’ve gone through the sale process and couldn’t sell it for a price acceptable to the bank.  This means they think they can do a better job – whether that’s true or not.  It means they aren’t going to listen to reason any longer, when it comes to the loan at issue.

Before we get to the details of foreclosure, let’s talk about a Deed in Lieu of foreclosure.  This is a tool used by those who have just had enough and want to walk away from their loan.  This involved basically signing over the property to the bank.  If the bank accepts it, you (and they) can avoid the entire foreclosure headache – and avoid (if they agree) them coming after you for the remaining balance on the loan.  You can then walk away worry-free.

Foreclosure is a heck of a process.  It takes time, effort, and worry – on both sides of the room, and it results in the maximum hit to your credit.  In Connecticut, we have only judicial-process foreclosures.  The bank can’t just kick you out – they have to go to court.  There are two types of foreclosure procedures – strict foreclosure or foreclosure by sale.

In a strict foreclosure, a public sale of the property is announced and conducted.  A lis pendens is filed providing notice to the public.

In a strict foreclosure, the bank takes possession of the property directly.  An amount of time is set aside for the owner to pay, but at the end of that, if the property is not paid for, it becomes the banks.  You can usually count on this process taking north of two months – minimum.

Unfortunately Connecticut is not a non-recourse state.  What this means is that if the sale of the property does not bring in enough money to pay off the loan, the lender can continue to come after the debtor for the remainder.

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