Anchorage Daily News

Sometimes pride and emotions cloud our thinking. While Anchorage is faring much better than other parts of the United States, a personal tragedy such as divorce, job loss, health problems or a reduction in income can depress even the most optimistic. If you think you may have troubles making your house payment, the time to act is early, when you have the most options available. The following is a list of steps to clip and save -- just in case.

Step 1 -- Assess your financial situation.

Regardless of how you got into this position, if you are having problems paying your bills, now is the time to act. It is easy to say "stop spending," but consulting with an approved debt-counseling center (such as Consumer Credit Counseling) can provide objective solutions. Debt counseling looks at your specific situation and contacts your creditors to work out new terms or payment plans. Your first goal is to reduce your spending and monthly debt.

Step 2 -- Contact your lender and only your lender.

As you move to this step, especially with the results of the new stimulus package not yet fully realized, avoid scam artists by only dealing with your lender. Your lender is the only one that can help with this step.

The earlier you ask for help, the more options may be available. The options will depend on whether your financial predicament is short-term or long-term. Each lender has different rules and procedures, and many will not help until you are late on your payment. However, late does not mean months. Late can be five days after your payment is due. Three or four months late might be too late to save your home.

So be prepared. The lender will need your most recent pay stubs to show the change in your net income. The lender also will confirm that you have already been through an approved debt counselor. A computer program analyzes just how tight your financial situation is and compares that to what it will cost the lender to foreclose. Since foreclosing can cost a lender more than $20,000, it is usually cost effective for a lender to try to work with you.

Here are five options a lender might offer. The first three work for temporary financial setbacks.

Option 1: A modified repayment plan.

This option works if skipping a couple of payments helps you through a short-term problem. Typically, the unpaid payments (including interest) are divided over 10 months. Your mortgage payment is slightly higher for that period, but your temporary setback is hopefully over by then.

Option 2: Term modification

Depending on how well you presented your financial situation, the lender might modify the terms of your loan. For example, the lender could re-amortize the number of years to repay the loan, adjust the interest rate, or forgive a portion of the principal.

Option 3: Claim on mortgage insurance.

Depending on the type of loan you have, and if you have been paying mortgage insurance premiums, your lender might file a claim on your behalf for the past-due mortgage and interest payments.

Option 4: Short sale.

A short sale is selling your home for less than you owe and requires approval of your lender and patience from your buyer. It takes time to organize, so early lender involvement is essential. A short sale is not as damaging to your credit as foreclosure and could also cost the lender less.

Depending on what other assets you have, you might be required to sign a promissory note to repay the shortfall.

Option 5. Deed in Lieu of Foreclosure.

If you qualify, a Deed in Lieu of Foreclosure is the final option before a foreclosure. The lender simply takes the house without foreclosing. This option is for hardship cases (divorce, job loss and death) that meet certain requirements. There are potential tax consequences with debt forgiveness, but the lender does not seek a judgment for the unpaid balance, so it can be less damaging to your credit.

For the last two options, check with your accountant on what must be reported on your tax return.

Step 3 -- Bankruptcy.

At this point, you've gone to debt counseling and are paying the minimum amount of your adjusted debts, but it will take longer than five years to pay things off. You haven't been successful at obtaining an affordable restructure of your mortgage. Whatever the hardship, you are financially underwater.

Your final step is filing for either a Chapter 7 or a Chapter 13 bankruptcy, depending on where you financially fit. You can file every seven years, and both options are complicated enough that attorney assistance is recommended for the maximum protection of your remaining assets.

Chapter 7 allows a court-appointed trustee to sell your assets to pay off creditors. Some of your assets could be exempt from the asset sale to allow you to keep enough cash to start over again.

A few of the requirements for Chapter 7 are that you must have:

• Obtained credit counseling.

• Income below the median income levels for Alaska.

• Filed any overdue tax returns.

Chapter 13 buys you some time by allowing you to reorganize your debts by setting up a structured repayment plan.

A few of the requirements of Chapter 13 are that you must have:

• A repayment plan covering the next three to five years.

• No more than a million dollars of secured debt.

• Regular, stable income with enough extra income after living expenses for the repayment plan.

While no one wants to take the final step, protecting as many assets as you can helps provide your family with the money necessary to start over.

Clair and Barbara Ramsey are local associate brokers specializing in residential real estate. Their column appears every fourth Friday. Their e-mail address is info@ramseyteam.com.

ADVERTISEMENT