October 12, 2010 in Debt

4 ways to save your home during bankruptcy

Dear Bankruptcy Adviser,

I have a first and second mortgage loan. I missed seven payments on the first and two payments on the second mortgage (a home equity loan). I owe $50,000 in credit card debt. Can I file Chapter 7 bankruptcy and keep my house? PLEASE HELP. I am very depressed about this situation.

— Judy

Dear Judy,

I can completely understand your depression, but you can’t escape dealing with your situation. Depression can lead to denial and avoidance. I’m not acting as if I’m a psychologist, but I see a similar pattern with clients all the time. The “head in the sand” approach is not an available option.

You have four options. All four are difficult or impossible, but these are the only options I see available to save the home.

Modify your loan with the lender. You might qualify to restructure your mortgage loan, which would bring the account current and, it is hoped, establish an affordable payment. You will need to modify the first and the second mortgages.

Unfortunately, lenders appear to be less willing to approve mortgage loan modifications. Even more common now, owners with equity in the house are saying that lenders are routinely declining modifications. I don’t have statistics on this claim, but it does make sense. The lender will get its balance paid in full after foreclosing on the property.

Bring the mortgage current. Yes, those four words are easy to write, but actually coming up with those funds may be impossible. You may need to rent out rooms in your home to bring in additional income.

File Chapter 13 bankruptcy. This is known as a reorganization bankruptcy. That means you will bring the mortgage loan or loans current over the next three to five years. During that time, you will make your current mortgage payment to the lender and a second payment to the person assigned to your case, called a trustee. The money you pay the trustee will be used to pay delinquent first-mortgage payments, your second mortgage and debt from other creditors.

The lender will not be able to reject your loan payments when you file this type of bankruptcy. You will keep the house as long as you make the mortgage payments and the payment to the trustee. You may be able to eliminate the second mortgage through Chapter 13. This is possible if the value of your property is worth less than the balance you owe on the first mortgage loan.

For example, you owe $250,000 on your first mortgage, but the value of the property is $249,000 or less. You are eligible to eliminate the second mortgage only upon completion of the Chapter 13 plan. Discuss this option with a competent bankruptcy attorney in your area.

File Chapter 7 bankruptcy. I don’t know about your assets, the state in which you live or your income. So, I am not sure that you qualify for a Chapter 7. If you do, you might realize what some of my clients have concluded — that they can’t afford a Chapter 13 bankruptcy and prefer to only wipe out the credit card debt in Chapter 7. After the Chapter 7 is complete, the client re-applies for a loan modification with the lender. The lender might be more willing to work on a modification once you have eliminated the credit card debt.

It is hoped that one of these four options can work. I know you will have a lot of work to do in order to resolve this, but debt denial and avoidance are not routes you can afford to take if you want to save your house.

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