Facing Foreclosure

Q: DEAR BOB: We are three months behind on our mortgage payments because of illness and unemployment. The loan servicer has been uncooperative when we have tried, several times, to make partial payments. Last week, the servicer began the foreclosure process by recording the legal documents. So far we have heard from three lawyers who specialize in bankruptcy. They tell us to file for bankruptcy protection to stop the foreclosure. Is this a smart decision? -- Alice V.

A: DEAR ALICE: Filing for either Chapter 13 bankruptcy reorganization or Chapter 7 liquidation will delay the foreclosure sale of your house, but the auction will eventually occur unless you reinstate the mortgage, refinance it or sell the house. When you file for bankruptcy, an automatic stay stops creditors from collection efforts, including a foreclosure sale. But because your mortgage is secured by your home, filing for bankruptcy won't prevent the forced sale unless you make up the missing payments or pay off the mortgage by refinancing or selling the home.

Unless you are truly broke, a bankruptcy filing could be a major mistake. Creditors look unfavorably on bankrupt debtors. Chapter 13 bankruptcy, if you now have income, allows you to reorganize and pay off your debts over as long as five years. However, if you miss any payments in your reorganization plan, the lender can proceed with the foreclosure.

Chapter 7 is what I call ultimate bankruptcy. If you have more liabilities than assets, you can be forced to sell your home and other major assets, with some exceptions, like work tools. Your creditors would be paid, usually pennies on the dollars owed. If you have equity in your home, the mortgage lender will get 100 percent payment as a secured lender.

Don't be railroaded into filing for bankruptcy. Talk with a certified bankruptcy counselor to discuss your alternatives. Maybe the situation isn't as dire as you think.

DEAR BOB: We bought our home in May. Recently, we received an official-looking form telling us that the "U.S. Government Federal Citizen Information Center" Web site recommends that property owners have an official or certified copy of their deed. This company offers to sell us a certified deed copy for $69.50. This is our fifth home, and we have never received this type of letter before. Is it legitimate? -- Carmine C.

DEAR CARMINE: There is no need for you to obtain a certified copy of your deed. If you want a copy of your deed, just stop by your local county or city deed recorder's office and buy a copy for about $10. Or phone the title insurer where your home purchase was insured and ask for a courtesy copy of your recorded deed.

DEAR BOB: My husband and I are retired. We own our home, worth about $500,000, without any mortgage. Now we want to add a bedroom and a family room. Is the best way to pay for this a home-equity line of credit or a fixed-rate mortgage for about $100,000? -- Gerry M.

DEAR GERRY: Either alternative is all right. With a $100,000 mortgage, the fixed interest rate should be about 6.5 percent today, and you will have to pay costs. You will then have a fixed monthly payment for 15, 20 or 30 years. But a home-equity line of credit is more flexible and easier to obtain. There are usually no closing costs.

However, the interest rate will be higher, probably around the prime rate, 8.25 as I write this. My preference would be a home-equity line of credit for as large an amount as possible, perhaps $200,000 to $400,000 in your situation, depending on income, just in case you need cash quickly for an emergency or an investment opportunity. For example, several months ago, I obtained a $400,000 line of credit over the phone from a major nationwide bank at an interest rate below prime. I haven't used that money, but it's nice to have it easily available. The major benefit is it doesn't cost anything until you write a check to use the money.

Your monthly payments can be as low as interest only, or you can pay more and reduce the principal balance rapidly. Then you can re-borrow the money. After your home improvements are complete and paid for, you can decide if you want to refinance with a new first mortgage.

DEAR BOB: If a senior owns several properties and the deeds have his or her name only, what happens to the properties when the owner dies? Will they go to the children?