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 Dear
Bankruptcy Adviser,
I bought my house last year, but this year my
income has been reduced because the market is
bad. Do you think that I should file bankruptcy
even if I have never missed my mortgage payment?
My income can't cover my mortgage payment.
-- H.T.
 Dear
H.T.,
You are in a very frustrating situation. At the time you bought your home you could handle the mortgage, but now that your income has been reduced, the monthly payment is too high.
Many people are in a similar situation
and most handle it incorrectly. Basically, they
do not acknowledge the seriousness of the problem
early enough to do anything proactive. Instead,
most people take on credit card debt and may even
refinance (to use the equity in their home) to
pay their mortgage. Not long after that, most
people find themselves in a far, far worse situation.
Collection agents are calling multiple times every
day, the bank is foreclosing on the house, credit
card limits have been reached ...
But you, H.T., you are not most
people. You are doing the smart thing -- you're
aware that there is a problem and you are being
proactive. That's impressive. I know I am the
last person anyone wants to talk to because "bankruptcy"
is just such a negative word and demoralizing
process. But knowing what I know will help you
make the best decision. Unfortunately, you're
still in a tight spot. But you're far better off
than you would be in three months if you did nothing
at all.
The issues are these:
If you somehow manage to keep your
home without increased income, you'll still be
in a financially precarious position. You won't
have the ability to cope if you suddenly incur
additional expenses. One health-related issue
or some other problem could prove disastrous.
If at all possible, you want to maintain your credit. At this point, you don't need to file bankruptcy (though only an attorney in possession of all the facts could be sure). If you can avoid filing bankruptcy, that's a good thing.
Here's how you should proceed:
Contact the lender and let them know that you are about to start missing payments and that you'd like a short-term fixed rate on your mortgage.
If you have an adjustable-rate mortgage,
or ARM, some banks may give you a fixed payment
for 12 months (before the mortgage readjusts to
the variable rate). So many mortgage companies
are facing dramatic increases in defaults and
foreclosures, they might be willing to work with
you. It works sometimes for my clients in bankruptcy,
but each case is unique.
However, H.T., unless your income increases, your home is still too expensive. A fixed rate or fixed payment may keep your payments lower than they would be if they were adjustable. This is a good thing to do, if you can -- but it only buys you some time.
The next step is the tough one, the one you don't want to hear. But I believe it's the right thing to do because it will drastically reduce your financial vulnerability and protect your credit at the same time.
List your property for sale immediately.
H.T., I know this is such a big deal and that now is not the ideal time for selling a home -- unless that sale will protect your credit and ensure that you have a solid financial footing.
If there is equity in your home, then that's great -- you'll end up with the cash. If there isn't equity in your home, that's fine -- you are still better off selling it. You'll be free of an asset that's depreciating (in today's market) and you won't have that enormous mortgage payment.
I know it's no fun to sell your home, but most people would wait until the bank forecloses and end up getting less or no money and under more emergent circumstances. Good for you, H.T., for starting to address these issues early.
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