Going bankrupt again? What’s the problem?

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Dear Debt Adviser,
I went through foreclosure two to three years ago. I haven’t heard anything from the lender since. I recently received a collection call from my second mortgage company. Can they make a judgment against me and/or garnish my wages? I’m currently not working but my spouse is. I had a bankruptcy 10 years ago. Can I file again if they do get a judgment against me? Please help. My wife and I are confused.
— Tou

Dear Tou,
Yes, you are still responsible for the balance owed on your second mortgage loan, even when the collateral for the loan, your home, is no longer in the picture. Whether your wife is responsible as well depends on a number of factors, such as whether she was on the mortgage and whether you live in a community property state.

When your home was sold after the foreclosure, the sales price was apparently not enough to cover the balance of the second mortgage. Therefore, the second mortgage lender, not surprisingly, wants its money back. The lender can, and likely will, use all means at its disposal to collect the amount owed, including, if necessary, seeking a judgment from the courts to garnish wages or place a lien on any real property that you may own now or in the future.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 provides that a person may file a Chapter 7 bankruptcy once every eight years. So you are beyond the waiting period if you decide to refile. Before considering a bankruptcy, I suggest that you see an attorney and have him or her review your other legal options. Some questions to ask include whether the debt is beyond the statute of limitations for your state and whether the second mortgage loan papers were correctly drawn and executed.

Given the fact that you filed for bankruptcy protection 10 years ago and then had a home foreclosed three years ago, a question I strongly urge you to ponder is, “What am I doing wrong?” What I would like to see you and your spouse accomplish is to identify the areas in your financial lives that aren’t working and fix them.

Declaring bankruptcy once is unfortunate, doing it twice may well be the symptom of a basic underlying flaw in your approach to financial matters. No one is born with a financial gene, well, other than my father, but no one teaches us how to balance goals with risk and to plan for the future. I suggest that you use this crisis as an excuse to take a look back at your bankruptcy and subsequent home loss to determine what factors were in place that caused you to file, and whether you have addressed those issues.

For example, let’s say you needed bankruptcy protection because you were too optimistic about a business venture and then suffered a loss of income. The fix for those issues, so that you don’t end up in the same place again, may be to be more conservative in your planning assumptions. You also need to better control spending and not use credit cards for purchases unless you can pay off the balance in 90 days or less. Lastly, you should save three to six months of living expenses to bridge gaps in employment or other unforeseen emergencies.

For my readers who are in jeopardy of mortgage default or are already there, I suggest you take aggressive action to get in charge of your finances and research your options. Once a mortgage gets behind, a default or foreclosure can come at you faster than you think. Dealing with mortgage servicers can be frustrating and complex. Just finding the right person to speak with and filling out the forms can seem impossible.

A great new resource is available from the Housing Preservation Foundation and FICO, the credit score people, called Mortgage Relief Online. The Web site helps you find out if you are eligible for mortgage refinancing or loan modification through the government’s Making Home Affordable program. It also can put you in touch with counselors that will help you with the paperwork needed. The services are provided at no — that’s right, I said, “No” — cost to the consumer.

Good luck!

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