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 Dear
Bankruptcy Adviser,
Can we keep our home if we file Chapter 7 bankruptcy,
even if we are upside down on the mortgage? Thank you!
-- Samir
 Dear
Samir,
What I'd like to do is explain some specifics regarding the
situation you're in so that you can make the best possible decision. I'll start
with the good news.
The good news is, you are likely to be
able to keep your home and continue living in your home as long as you can make
your mortgage payments. The bad news is, once you read the
rest of this article, you may consider bankruptcy to be the best possible option. Samir,
as you know, when your home is "upside down" that means that the value
of your home has dropped below the amount of your mortgage -- in other words,
you owe more than it is worth. Now, the value of homes has been decreasing and
is likely to continue to decrease. As a result, trustees -- the people who supervise
bankruptcy cases -- are finding it more difficult to find any equity in homes
right now. Therefore, the trustee is likely not to make any
issue of your property value. As long as you're making the payments, there will
be little or no issue with you keeping the property. The issue
is whether it makes financial sense for you to keep a house that is worth less
than you owe. Depending on the state you live in, property values may be on a
continual decline. You could find yourself in a very difficult position in a few
years if you needed to sell your home.
Additionally, if you've declared
bankruptcy and kept your home, you will find it
difficult, if not downright impossible, to be
able to refinance your current mortgage. On top
of that, if you have any kind of loan that will
adjust soon -- meaning, you have a variable interest
rate that is increasing -- then your home may
become even more expensive to maintain.
I take it for granted that you are
attached emotionally to your home. I feel strongly
about my home, and so does my wife. I can understand
that you won't want to sell your house unless
the terms are in your favor. You'd rather sell
at a profit than a loss. It makes sense.
In this
case, however, the difference could be between taking a small loss now and taking
a bigger loss later on. In the current real estate environment, it might be in
your best interest to let the house go, erase your mortgage debt through bankruptcy
and start saving for your next home.
If you file Chapter 7 bankruptcy,
I suggest remaining in your home only if your
loan is at a fixed rate, you can manage the payments
and you can remain there for at least five years,
which is long enough for the market to stabilize.
Otherwise, it may be to your benefit
to use bankruptcy to wipe out your debt, including
your mortgage debt, and start saving money anew.
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