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One of the most exciting aspects about bankruptcy is the flexibility that this law gives clients to accomplishing their goals with their homes and other real estate.
Bankruptcy is not a cookie cutter one-size-fits-all law that dictates the same solution for everyone. There are literally so many options and opportunities in bankruptcy that clients can usually custom fit and choose the outcome that best meet their needs.
Because there are this many options, we won’t be able to review all of them. Rather, we’ll focus here just on the 4 most popular options clients have with their homes in bankruptcy.
Probably the most common option that client’s choose with their homes is to keep the home and pay their mortgage unchanged as if they never filed a bankruptcy.
You see most clients file their cases because they can’t keep up with their credit card payments or because their credit cards are keeping them from paying their mortgage. The mortgage usually isn’t the problem.
So the bankruptcy does its job by wiping out their credit card debts and they keep paying the mortgage just the same as they always did. And after the bankruptcy, they can then do whatever they want with their home, whether that’s to keep it, sell it, refinance it, or whatever they please. The point is that in most cases, clients don’t “involve” so to speak, their homes in their bankruptcy.
Another popular option is to actually save the home from a foreclosure by filing a bankruptcy. Often these days clients lose their jobs temporarily and stop paying their mortgage simply because they cannot afford to do so. But many of these clients have every intention of catching up on their mortgage once they find new employment.
The problem is that when you’ve missed enough payments, many mortgage companies become very unreasonable and simply won’t work with you. While you may have been thinking that once you find that job you’ll be able to strike a deal with the mortgage company to make your regular payments plus something extra each month until you catch up, this is often not allowed.
In many cases, the mortgage company wants a lump sum of the entire amount you are past due plus interest, late fees and all other kinds of cost. They won’t take the regular payment and a catch up amount over time.
And if you cannot pay what they’re demanding immediately, things just get worse when they file a foreclosure. Because in a foreclosure not only are you under a short time limit to fully catch up by paying a lump sum, but also the amount needed to catch up is larger because it now includes the mortgage company’s attorney’s fees and foreclosure costs.
When client’s cannot pay this amount but want to save the home from foreclosure, they often file a chapter 13 bankruptcy. This allows them to spread out and pay back the amount they are behind on the mortgage over a period of up to five years instead of all at once. So it’s offers a reasonable way to save the home.
A third popular option is to make the home more affordable by chopping off the second mortgage in a chapter 13 bankruptcy and leaving the first mortgage unchanged.
After the recent collapse in the housing market, many homeowners found themselves in a situation where their homes were worth a lot less than the value of their mortgages. While many simply walked away from their homes because it did not make financial sense to keep them, others decided to keep their homes and make them worthwhile investments by chopping off the second mortgage.
Now this relief is only available when the first mortgage itself is worth more than home. In such a situation, everything past the first mortgage, even a second and third mortgage, can be chopped off.
And the result is that after the bankruptcy has been completed, a client now has a home that they are able to afford because they only have one mortage, instead of two or more. As an added benefit, they much sooner may have equity in their home.
A fourth popular option is to let the home go without consequences by simply including it in the bankruptcy and avoiding a foreclosure deficiency judgment or tax consequences.
Often clients purchase their homes when their lives are stable and everything is going good. Sure the mortgage may be expensive, but that’s no problem when their income in enough to support it.
But then something unexpected happens. A job loss, reduction in hours, illness, divorce or any unexpected event can make it, so that the mortgage is unaffordable. The home now becomes a weight around their neck and they want to let go of it before they drown financially.