Many people come to a bankruptcy attorney on the eve of a home foreclosure sale. They must first decide whether they should keep the property. They then have to figure out how. In most cases, Chapter 13 is the best method to do this. The debtor must be prepared to make payments both during and after bankruptcy. But, keeping a home is definitely possible.
Lately it seems as though individuals and couples filing for bankruptcy (especially Chapter 13) are doing so for one reason, to save their house from foreclosure. Some people believe, based on what they have read, heard, or seen, that bankruptcy will prevent foreclosure. To some extent, they are right. Bankruptcy can permanently prevent foreclosure. But, for most people, the protection is only temporary.
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All Too Common Scenario
Let's take a look at a common situation. In 2006, a couple buys a new house for $800,000 in a new development in South San Jose. They are not required (and do not) to provide any down payment. Their initial loan is a five year interest only loan at 4.5%. Their monthly payment during the first five years is $3,000 (this does not include private mortgage insurance, taxes, homeowner's insurance, etc.). When the couple purchased the house nobody thought the market could decline, especially in the Bay Area. The couple both had what they thought were stable jobs and an income that could sustain the loan and the existing payments. However, as the months rolled on and all the house costs came in, the budget became tight, but still manageable.
Now, we fast forward to 2011. In quick order, the loan payment alone has jumped over $1,200 per month, the house is worth $200,000 less than what the loan value is, the couple still has both jobs, but salary has slightly decreased, and their stability of employment has greatly declined. Anything that can be paid with a credit card is. The entirety of the debt becomes too much, and now the couple is late on their mortgage. Default notices appear, and the bank has sent a note of a foreclosure sale.
The couple calls up a bankruptcy attorney, preferably one located in Los Gatos with Henshaw as part of his or her name, looking to save the house they have been in and created lasting memories in for the past five years. They love the schools for their children, their neighbors, and all that the neighborhood provides.
What Bankruptcy Can Do
Now we have to look at the realities of what bankruptcy can do for this couple. First, the filing of a bankruptcy petition will immediately stop any foreclosure sale or other proceeding against the couple through the imposition of an automatic stay. In general, this stay will last throughout the bankruptcy case.
The most important question an individual or couple in this situation must ask is whether the house is worth saving. The second question is whether saving the house is feasible. We have to look at a couple factors in determining this second question, including the bankruptcy chapter and the value of any first or second loans as compared to the value of the property.
In Chapter 7 (liquidation of non-exempt assets), the home lender will likely seek relief from the bankruptcy case's automatic stay (which prohibits the foreclosure). The grounds they mostly use in such situations is that their collateral (the house) is not adequately protected because the debtor (person that files for bankruptcy) has no equity in the property. In the vast majority of cases, this is all that is necessary for a lender to show when the debtor is in default and has no equity in a property.
Chapter 13 bankruptcy provides a more realistic option for our couple. Chapter 13 cases required the debtor to provide a plan of reorganization of debt. While in most cases Chapter 7 debtors are not required to either sell property or pay creditors after the close of a bankruptcy case, the Chapter 13 debtor has a required payment plan of three to five year years. One large benefit of Chapter 13 is that through the plan, the debtor can make up for delinquent mortgage payments. This can be done in a number of situations because other debts are reduced or even wiped out completely.
Another benefit of Chapter 13 is the ability to strip a second mortgage off. This lienstripping ability is only available in situations as described above, where the first loan is at a higher value than the market value of the property, with the second completely outside of the value. In our situation, because the value of the home is now $600,000, and the first loan is for $650,000, the second loan amount of $150,000 can be stripped off, leaving the debtor with only a loan for $650,000 to pay off for the property. This can be of a huge benefit, but only if the debtor is able to make payments on that first loan. Chapter 13 bankruptcy cannot reduce interest rates or values of a loan that is based on a debtor's principal residence.
What this means is that if the couple can afford to do both(a) pay off the delinquent payments owed on the first loan, and (b) pay the regular payments of the loan, they can keep the house. What they would need to do to show the bankruptcy court this is to either start or continue to pay the lender while the bankruptcy case is ongoing. If the lender is receiving no payment during the time the case is pending, it is likely they will seek and receive relief from the automatic stay.
Keeping a house in bankruptcy in this economy is possible for some. Bankruptcy can be of a substantial benefit in keeping that property. However, knowing what is required is necessary before the process is initiated.
Call the Henshaw Law Office today if you are in a similar circumstance.
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