How to Keep Your Home

Bankruptcy Benefit #1

Bankruptcy prevents a foreclosure sale, allowing you to pay the penalties from default over the Chapter 13 plan period.

When a consumer files for Bankruptcy an automatic stay is put into effect. This automatic stay is equivalent to a stop sign which temporarily stops a lender’s ability to pursue collection on the debt that you owe. For a home owner facing foreclosure, this forces the lender holding the mortgage on your home to stop the foreclosure for the length of the automatic stay. Thus, the filing of a Chapter 13 can prevent a foreclosure sale from taking place as long as the petition is filed before the actual foreclosure sale.

The foreclosure notice received is a result of a default on the mortgage. When a default occurs, most mortgage lenders accelerate the entire balance of the loan to be due at once. Included in this amount is the amount of any mortgage payments that were not paid (arrears), interest, penalties, and cost of the lender in going forward with the foreclosure. Negotiating with mortgage lender is an option at this point. However, many times the mortgage lender will require that you at least pay the amount of your mortgage arrears. Of course, this is often not possible for the consumer.

The U.S. Bankruptcy Code gives the consumer an important tool in keeping their home. Under Chapter 13 Bankruptcy, a consumer is allowed to modify the payment timing of their mortgage arrears and the penalties, interest, and cost that are associated with the arrears. This amount is put into the Chapter 13 plan and allowed to be paid back over a period of 3 to 5 years, depending on the actual length of the Chapter 13 plan. Thus, the mortgage lender will have no choice but to accept payments for the arrears and penalties over the Chapter 13 period so long as the consumer maintains his normal monthly mortgage payment once the Chapter 13 payments begin.

• Example 1 – Harriet Homeowner debtor has a mortgage balance of $80,000, with her home being valued at $150,000. She has a normal monthly mortgage note of $1500. She has defaulted on her monthly mortgage payments resulting in the mortgage company initiating foreclosure proceedings and accelerating the mortgage debt—adding in penalties, fees, interest, and arrears totaling $6500. By Filing a Chapter 13 petition, consumer debtor successfully stopped any foreclosure proceedings because of the automatic stay. She now can keep her home and preserve her equity by continuing to pay her $1500 mortgage note. Her $6500 in fees will be paid in installments over 3 to 5 years, depending on the specifics of the Chapter 13 plan.

Bankruptcy Benefit #2

Bankruptcy can allow you to walk away from a home when the mortgage balance is worth more than the home.

For the first time in recent history, many homeowners are facing the prospect of their home decreasing in value thus having their home mortgage note be higher than their homes actual value. Fortunately, Chapter 7 and Chapter 13 allow the consumer the option to walk away from their home and not be liable for the full deficiency.

Chapter 7

With Chapter 7 Bankruptcy, you have the option of reaffirming your agreement with your mortgage lender. Reaffirmation is essentially an agreement between the lender and the consumer where the consumer agrees to pay a debt that would have otherwise been discharged. In Bankruptcy, this means that if you do not comply with the requirements of the reaffirmation agreement then you will be subject to foreclosure and any possible deficiency. If your house is worth less than the home’s value then surrendering your home and allowing it to be liquidated may be the best option. In this situation, the money that is received when your house is sold will go first toward any lenders who have a mortgage against your house. Any deficiency that remains is then discharged as unsecured debt upon completion of Chapter 7. Remember that not everyone files for Chapter 7. 

• Example – Harry Homeowner purchased a home 2 years ago and currently has a mortgage balance of $100,000. Harry qualifies for Chapter 7 relief for and decides to surrender his home rather than reaffirm his mortgage obligation. When liquidated during the Chapter 7 process, Harry’s home brings in $75,000. The $25,000 difference between what the house was sold for and the balance of the mortgage is treated as a general unsecured claim. This amount will be grouped with any other general unsecured claims such as credit card debt and be discharged.

Chapter 13

Chapter 13 allows a similar option for those who do not qualify for Chapter 7. Under Chapter 13, the consumer is allowed to surrender the home to the mortgage lender. This surrender eliminates the secured claim (the amount of the mortgage balance). This means that the consumer will not be forced to pay the monthly mortgage amount during the Chapter 13 plan. If the home is worth less than the mortgage balance, then the difference is treated as general unsecured claim. The consumer will then only be liable for a portion of this general unsecured claim as provided for under the Chapter 13 plan.

• Example -- Harry Homeowner purchased a home 2 years ago and currently has a mortgage balance of $200,000 and monthly payments of $2,000. However, it is determined that the home is only worth $175,000. When Harry files for Chapter 13 he decides to surrender the home. The specifics of Harry’s plan show that he will pay general unsecured creditors 20 cents on the dollar. Harry is relieved from the $2000 per month mortgage payment and $175,000 of the mortgage loan. The $25,000 balance on the mortgage note is treated as a general unsecured claim meaning that Harry will only have to pay back $5,000 (25,000 * .20). Harry will be able to spread this $5,000 over 36 to 60 months, depending on his Chapter 13 plan. The remaining $20,000 deficiency will be discharged.