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Bankruptcy and Other Alternatives for Avoiding Foreclosure, Part 2

By Columbia – Lexington Bankruptcy Attorney Lex Rogerson

The SC HELP program can be an excellent way to deal with a delinquent mortgage, but not everyone qualifies, and there may be tax consequences.

Foreclosure - optimizedIn this series of articles, we discuss alternative methods of avoiding foreclosure, other than a chapter 13 bankruptcy, where a homeowner has fallen behind on mortgage payments. This second article deals with a federally funded homeowner assistance program called SC HELP.

What is SC HELP?

It’s an acronym that stands for the Home Employment Lending Program.

Earlier during the foreclosure crisis, the Obama Administration started several initiatives to prevent the losses to both homeowners and mortgage lenders that occur when a home is foreclosed on.  One program gave grants to states to set up foreclosure prevention programs.  South Carolina, through its Housing Finance and Development Authority, received over $295 million from the US Treasury and set up the HELP program as its foreclosure prevention eff0rt.

The basic theory of the program is to make forgivable loans to homeowners to allow them to save their homes or grants to ease the transition if they are unable to do so.

How does SC HELP help?

The program provides three different kinds of help.

  • Transition Assistance.  If it is not possible to save your home, you could receive a grant of up to $5,000 to help you move to another home. This is typically not the kind of assistance my clients are seeking.
  • Monthly Payment Assistance. If you have had a temporary setback, the program can help you make your future mortgage payments while you get back on your feet.
  • Direct Loan Assistance. If you have fallen behind on your mortgage payments, the program can lend you the funds to catch up.

When the program started, the maximum help was $25,000, and you could only receive one form of assistance.  Now, however, recipients can combine different kinds of assistance — say, a direct loan to catch up with the mortgage and monthly payment assistance to allow you to remain current — and can receive total benefits up to $36,000.

Recipients of monthly payment or direct loan assistance will sign a note and mortgage on the home.  As long as the recipient remains in the home, 20% of the loan is forgiven annually, and in five years it is forgiven in full.

Who can take advantage of the program?

Ah, there’s the rub.  Not everyone with mortgage problems can get HELP.

First off, the mortgage servicer must have agreed to participate in the program.  Because the list of participants fluctuates from time to time, SC HELP no longer publishes a list of participating servicers. But it does publish a list of servicers and lenders who do not participate.

If the servicer does participate, the applicant must meet certain requirements, which include:

  • The home must be a full-time residence.
  • The applicant must be on the mortgage.
  • The original mortgage amount must have been less than $729,751.
  • The applicant can not be in an active bankruptcy case, though those who plan to file in the future or have recently been discharged may qualify.
  • The applicant must have had some serious but temporary financial setback such as unemployment, underemployment, divorce, death of a spouse, or catastrophic medical expenses.

The important word there is “temporary.” SC HELP is not a solution for the homeowner who is not able to afford the mortgage payment and never will be.

The program strongly suggests that applicants apply online. To see if you may be eligible, click here.

What’s the downside?

Aside from the possibility that you don’t qualify, the main disadvantage of the program is that a grant or forgiven loan may represent taxable income. But there are situations where the benefits are not taxable, and the rules can be complicated. You should consult a tax adviser about this risk and about what you should do if you receive a 1099-C.

What if I don’t qualify?

The prospect of receiving assistance that does not have to be repaid can make SC HELP a very attractive way to deal with mortgage problems. But if the program does not work for you, you may want to consider the other foreclosure alternatives discussed in this series, including bankruptcy.  Chapter 13 can allow you to catch up with a delinquent mortgage gradually over a three- to five-year period and can sometimes write off underwater second mortgages.

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