Always make your mortgage payments on time. If you can’t, call your lender immediately. Even the most reliable borrowers sometimes fail to meet every payment on its due date. An unexpected crisis (long illness, job loss etc.) can negatively impact your ability to pay. Don’t be intimidated or embarrassed to call your lender. They want to help you avoid foreclosure and can only do so if you contact them. (Be sure to call the company to whom you currently send your loan payment, not the company who first opened your mortgage.)

Steps to avoid foreclosure

Here are some immediate steps you can take to help save your home and avoid foreclosure. Consult your tax advisor before you make any decisions. There could be tax costs or benefits that come with any of these ideas.

If you fall behind in making your mortgage payments, don’t hide from the situation. Contact your lender immediately. The sooner you do, the more options may be available to you.

Typically, if you work directly with your lender, they develop a plan to help you avoid foreclosure. A lender is motivated to help you stay in your home. Foreclosure can be a complex process in which lenders must strictly follow state and local laws, go through legal channels, take possession, often make repairs, market the home, and successfully sell it. Because of the extensive costs and effort involved, lenders usually consider foreclosure a “last resort.”

The U.S. Department of Housing and Urban Development (HUD) provides a list of approved housing counselors on their website. A HUD-approved housing counseling agency can help you figure out your financial situation and recommend where you can cut costs, which can help you to pay the past due amount, if possible. You may be able to find a local housing counseling agency that can help you negotiate with your lender.

The Homeownership Preservation Foundation has a National Assistance Hotline (1-888-995-HOPE) that provides advice, assistance and support to help individuals and families who are struggling financially to stay in their homes. For additional information, visit hopenow.com.

If you cannot pay the entire amount you owe on your loan, discuss a loan workout arrangement or mortgage modification with your loan servicer to avoid foreclosure. This means restructuring the loan in a way that enables you to repay. There may be several different options.

Talk to your lender about the possibility of establishing a new repayment schedule for your mortgage. This is known as a loan modification, or restructuring the loan.

Loan modification is a change in one or more of the mortgage loan terms in order to make the monthly payment more affordable given the borrower’s present financial situation. These changes may be made on a temporary or permanent basis and could include changing the loan’s interest rate, monthly payment amount, or time available to repay.

If your financial circumstances dramatically change, you may not be able to find a way to pay your loan — even after working with your lender and a housing counselor. You may find that the best option is not to keep your home.

In this case, one option may be a short sale, or pre-foreclosure sale. A lender will typically want the home’s sale price to repay what you owe on the mortgage, but may be willing to accept an amount less than what is owed. Discussing the short sale option with your lender as early as possible is helpful. Don’t sell your home for less than what you owe without talking to your lender first.

Another option may be a deed-in-lieu of foreclosure. This is when you give your property back to the lender.

If you owe more than you can repay or are facing significant financial challenges, you may have the option of declaring bankruptcy. Bankruptcy is a legal process that involves seeking the help of the U.S. Federal Court to release or “discharge” some of your debts and get a fresh start financially.

Bankruptcy is a serious matter that can have significant, long-lasting consequences. Bankruptcy law is complicated and changing. It’s essential to get professional counseling about your options.

Note: Avoid companies that charge you a high fee upfront and claim they can help you avoid foreclosure. These could be scams!

house icon

about bankruptcy

Bankruptcy is a legal process that involves seeking the help of the U.S. Federal Court to release or “discharge” some of your debts and get a fresh start financially. In recent years, bankruptcy filings have reached an all-time high.

Bankruptcy is a serious matter that can have significant, long-lasting consequences. While it may be an option, it’s not an “easy way out.”

Before you file

Talk to your creditors to see if they will agree to extend your payment schedule, allow you to skip a payment, or make some other reasonable repayment alternative. Discuss any possible solutions.

Consult with an attorney, qualified credit or debt counselor. Bankruptcy law is complicated and changing. In recent years, the U.S. Congress has been reviewing and updating bankruptcy laws and state laws that affect bankruptcy. These laws vary, so it’s really important to get professional counseling about your options.

Downsides of filing for bankruptcy

  • You will have legal and court costs.
  • If you have co-signed on a loan, your co-signer will still be responsible for the full amount of a co-signed debt unless you make other repayment arrangements with the court.
  • You cannot claim any debts that you fraudulently took on knowing that you would be unable to pay them back. (Don’t think that you can take an expensive trip around the world and then declare bankruptcy!)
  • A bankruptcy will stay on your credit history for up to 10 years. It may lower your credit score, causing lenders to charge you higher interest rates in the future.
  • Some debts cannot be discharged through bankruptcy.

What you might keep and what you might lose

Depending on your personal financial situation and the federal and state laws that apply, declaring bankruptcy may eliminate some of your debts or allow you to repay just a portion of each debt you owe. The court may allow you to keep some of your assets in the process. Bankruptcy usually does not erase child support, alimony, fines, some taxes, and most student loan obligations.

concerned man scratching head

Without a lien

In a typical bankruptcy scenario, a debtor files a Voluntary Bankruptcy claiming the inability to repay his or her debts. If the bankruptcy case proceeds, the judge may decide to release the debtor from the obligation to repay some of his or her debts. This is known as “discharging” debts. Once a person’s bankruptcy case has been completed, none of the debtor’s former creditors may pursue the debtor for his or her discharged debts.

With a lien

However, if the debtor has defaulted on a secured loan—a loan in which the creditor has a legal claim, called a lien interest, in assets belonging to the borrower (such as a car, house, or other collateral) to ensure payment—the creditor may still be able to take possession of the collateral even though the debt was discharged.

Types of bankruptcy

There are several types of bankruptcy. Each is known by the chapter of the bankruptcy law that describes it. Two of the most common types are Chapter 13 and Chapter 7.

  • In Chapter 13 bankruptcy, the borrower submits a repayment plan to the court and promises to make partial payments to creditors over a period of three to five years. If you have a regular income and limited debt, Chapter 13 allows you to keep your property that you otherwise might lose, provided you continue to make your payments under the repayment plan.
  • In Chapter 7 bankruptcy, the debtor surrenders their assets to an individual called a “trustee.” The trustee sells the debtor’s assets and gives the money to the creditors. The debtor may be allowed to keep some assets, such as a car, work-related tools, and basic household furnishings. Under the new bankruptcy law, you can receive a discharge of your debts under Chapter 7 only once every eight years.

This summary is a very simplified explanation of the bankruptcy laws and procedure. However, it is by no means all encompassing. This summary does not constitute legal advice or the views of Wells Fargo & Company and should not be relied upon as such. Should anyone reading this summary contemplate filing bankruptcy, they should consult qualified legal counsel. Each bankruptcy is unique and no summary can adequately address all possible fact situations.