Keeping Your Home

Can I keep my house through bankruptcy? 

A main concern for many contemplating bankruptcy is whether they will lose their residence in the process.  What happens to a residence is a function of several issues, but, in general, if the equity in the house is exempt and you can keep making the payments, you can keep the house. In California, the homestead exemption runs from $50,000 to $150,000 depending on marital status, age and health.

Secured debt survives

The bankruptcy discharge eliminates your personal liability for the mortgage, but it does not eliminate the lien.  Thus, after bankruptcy, the mortgage lender still has its rights in the property, including the right to foreclose if you breach the loan agreement.  

But, just filing bankruptcy is not a breach of the agreement; however, failing to make the payments according to the loan agreement is a breach.  So, make the payments, keep the house.  

If you are behind on your payments and it makes sense to keep the house, consider Chapter 13.  Chapter 13 is about saving you home.

Consumer Bankruptcy and Your Home

If you are behind on your mortgage payments and are subject to foreclosure, understand that a Chapter 7 Bankruptcy will only delay foreclosure. If you want to keep the home, you will have to make up the past due payments (“arrears”) with your creditor, or ask them to "tack" the past due payments on the end of the note.  If you are current on your mortgage payments, you will have to make your payments before, during, and after the bankruptcy. 

Bankruptcy won't eliminate most liens on your home - your home is security for the loan. If you pledged your home as security for loans other than your mortgage - home equity or second mortgage - or a creditor such as the IRS has recorded a lien, those creditors, too, have claims against your home. These types of claims are called "liens." Most lien holders have a right to foreclose if the lien isn't paid off within a specified time.  However, in a Chapter 13, you might be able to “strip” the second mortgage (that is, remove it) if there is not enough equity in the residence thus making the second unsecured.

Behind on Mortgage Payments

If you are behind on your mortgage payments and looking for a solution, your first strategy should be to negotiate with the lender to seek to modify the loan. Many lenders are willing to negotiate. What the lender agrees to will depend upon your credit history, the reason for your missed payments and your ability to make future payments. For example, you miss a few house payments because you had a car accident and couldn't work for two months, but you will get back to work soon, the mortgage company will most likely make a deal with you rather than move for foreclosure. Several payment options with the lender include:

Spread out the repayment of the missed payments (arrears) over a few months.

Reduce or suspend your regular payments for a specified time and then add a portion of your overdue amount to your regular payments later on – usually on the back end of the loan. 

Extend the length of your loan and add the missed payments at the end.

Suspend the principal portion of your monthly payment for a while and have you pay only interest, taxes and insurance.

Refinance your loan to reduce future monthly payments.

Let you sell the property for less than you owe the lender and waive the rest. This is called a "short sale." However, many people question whether there is any benefit of a short sale to the seller.

If the Lender Starts to Foreclose

If your debt problems look severe or long-lasting, the lender will eventually take steps toward foreclosure. If you are faced with foreclosure and want to keep your home, contact The Law Office of Rick D. Banks immediately. 

In most cases, before foreclosure actually occurs the lender will "accelerate" the debt, meaning that you have to pay the entire balance immediately. If you don't, the lender will foreclose. Foreclosure usually takes about 90 to 120 days. During this time, you have several options:

Sell your home. However, in today's depressed economy, this often proves very difficult.

Get another lender to give you a loan that pays off all or part of the first loan and puts you on a new schedule of monthly payments. If the original lender has accelerated the loan, you will need to refinance the entire balance of the loan. If the original lender has not accelerated, then you need only finance those payments that you missed. However, this option is also often difficult because most homeowners are already in such a financial bind, they can’t qualify for a new loan.

File for Chapter 13 Bankruptcy. Chapter 13 will allow you to cure the default - make up missed payments - and make regular payments over three to five years.

If Foreclosure is Unavoidable

If you have equity in your home but cannot negotiate your way out with the lender, or the options described above are unavoidable, then Chapter 13 bankruptcy will often be a better deal than foreclosure. In bankruptcy, the trustee supervises the sale of your home. They will attempt to maximize the selling price. Also, debtors rarely recover the balance of sale proceeds in a foreclosure. In a bankruptcy, you are entitled to your cash homestead, if there are proceeds left over after the secured creditors have been paid off.

For more information, contact the Law Office of Rick D. Banks to schedule a Free Consultation to discuss your specific situation.