4 questions before filing Chapter 13

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Dear Bankruptcy Adviser,
My house is currently in foreclosure. The bank refused to work with me to restructure my mortgage so I could continue to make payments and keep the house. I am considering Chapter 13 bankruptcy in an attempt to save the house, but the bank refuses to make the payments low enough for me to afford. Please tell me if there is anything I can do.
— Gina

Dear Gina,
Chapter 13 is a reorganization of your debts in which you will pay back none, some or all of your debt over the next three to five years. The repayment period will depend mainly on your income, expenses and the amount of debt you need to repay. Consider the following four questions before filing Chapter 13 bankruptcy:

1. Can you eliminate the second mortgage? I would need to know how many mortgages are secured by your primary residence. You state that the value of your house is less than what you owe. If you have a first mortgage balance of $300,000 and a second mortgage balance of $50,000, but your home is now worth only $280,000, you may be able to pay back the delinquent payments on the first mortgage only.

In California, with the housing crisis we are facing, people have the ability to eliminate (extinguish) the mortgage liens if and when those liens are not secured by equity in the property. Hence, in the example above, because the second mortgage loan is “wholly unsecured,” it can be extinguished. Please note, this only can be done in Chapter 13 bankruptcy, and the lien will be removed from the title once you complete the three- to five-year repayment plan.

2. Will your loan payment adjust soon? This could make it impossible for you to pay your mortgage if you have a loan payment that will increase while you are inside the Chapter 13 bankruptcy. No one can predict whether interest rates will go down over the next few years.

The lender is not obligated to negotiate with you or your attorney to modify your original loan terms. While the lender might work with you in order to avoid another foreclosed house, there is no requirement for it to do so. Also note that the payment might adjust on one loan and not the other. If your first mortgage loan is fixed but the second is variable, then option No. 1 above might be feasible.

3. How long is your commute to work? Gas prices make this question very relevant. Paying another $300 to $500 per month in gas can be the difference in making your mortgage payment.

4. Can you afford to keep your home? This is the toughest question. Everyone is emotionally connected to his or her home and no one wants to involuntarily walk away from a place full of so many memories. Even if you have lived in the home for a short time only, it may represent to you that you are a success and can buy a piece of the American dream.

As we are seeing with the 1,300 foreclosure sales in California each business day, that American dream has become a nightmare. This crisis is just in the initial stages and it appears it will be getting worse and worse over the next couple of years. You may be able to walk away from this house and buy another one in three or four years with a payment and balance more in line with your economic reality.