Bankruptcy can stop some foreclosures
Filing for bankruptcy could provide the debt relief you need to save your home from foreclosure.
Bankruptcy judges can't alter any terms on your primary mortgage. Legislation that would have given them that power was defeated in 2009.
But judges can forgive other debts, including credit card and medical bills, and even second mortgages in cases where homes have lost a substantial portion of their value.
By reducing what you owe other creditors, and temporarily stopping foreclosure proceedings while you're in court, bankruptcy can make it easier for you to keep up with the payments on your primary mortgage.
When the housing crisis began, most homeowners facing foreclosure had borrowed more money than they could afford with expensive adjustable-rate mortgages.
Bankruptcy wasn't much help to them because those loans were so costly, they simply weren't worth saving.
But a growing number of homeowners facing foreclosures have reasonable, fixed-rate loans. They can't keep up with their bills because a layoff, illness or divorce has dramatically reduced their income.
Bankruptcy is a more promising option for them.
You've got to remember that judges cannot:
- Reduce the amount you owe on a first mortgage.
- Lower interest rates or payments on a first mortgage.
- Force lenders to refinance your mortgage.
In other words, the first mortgage you have going into bankruptcy will be the same mortgage you have coming out of bankruptcy.
However, bankruptcy judges can:
- Temporarily stop foreclosure proceedings while your case is in court.
- Give you time -- how much depends on the judge and your financial situation -- to catch up on your mortgage payments.
- Write down other debts so that you'll have more money available to spend on your mortgage.
A second mortgage is often the biggest debt homeowners have after their primary mortgage.
These can be home equity loans that were used to help finance the home's original purchase, a so-called piggyback loan. Or they can be home equity lines of credit taken out to pay off credit card bills or cover a child's college tuition.
These are secured loans with your home acting as collateral and usually can't be written off in bankruptcy court.
But property values have declined so much in some parts of the country that many homes are no longer worth as much as their primary mortgage, much less the first and second mortgage.
Say you have a house valued at $310,000 with a first mortgage of $200,000 and a second mortgage of $100,000. But property values plummet and it's now worth only $190,000.
That means your home's entire value is now needed to back the primary mortgage. That leaves the second mortgage "wholly undersecured" and eligible for elimination in a process called "lien stripping."
If you hope to have your second mortgage eliminated, you must file for Chapter 13, not Chapter 7, bankruptcy.
Many people filing for bankruptcy choose Chapter 7 because they just want all their debts to go away. Chapter 7 wipes out credit card debts, medical bills and other debts as allowed by bankruptcy law. However, Chapter 7 does not get rid of certain debts such as child support or taxes, and you cannot use it to eliminate a second mortgage.
Chapter 13, however, is not a straight bankruptcy as many people think of it. Your debts don't disappear. Instead, the courts make a plan for you to pay your debts over a period of time. Chapter 13 costs more and takes more time than Chapter 7.
But Chapter 13 has advantages, including more flexibility. It helps you deal with more types of debts, including child support and taxes, and you have no danger of losing your nonexempt assets. If you file Chapter 13, you can drop the case or switch to Chapter 7 at any time. And Chapter 13 is the only bankruptcy that lets you eliminate a second mortgage.
Some homeowners want the best of both worlds. They want to eliminate credit card balances and other debts with Chapter 7, and they want to strip the second lien on their home with Chapter 13. So they file Chapter 7 first and then Chapter 13.
Bankruptcy courts look closely at so-called "double bankruptcies," or Chapter 20 (7 plus 13). In some situations, double bankruptcies may be considered to be in bad faith. However, they have been allowed -- for instance, where homeowners filed Chapter 7 and later filed Chapter 13 after housing prices dropped even more. An attorney can tell you if filing Chapter 7 first and then Chapter 13 may work for you.
With your unsecured debt and your second mortgage -- or both -- eliminated or managed through bankruptcy, you may now be able to make your first mortgage payment.
You won't find bankruptcy to be an easy way out of a bad situation, but at least you'll still have your house or condo.
Another argument for trying to save your home through the bankruptcy courts involves what's known as your state's recourse laws.
If your home is seized and sold for less than you owe on the mortgage (plus tens of thousands of dollars in legal costs, fees and penalties), some states allow the lender to sue you for the difference.
It's better to go through a bankruptcy to try and avoid a foreclosure than endure a foreclosure that forces you into bankruptcy, as too many homeowners have discovered.
Having said that, anyone facing foreclosure should only consider bankruptcy after all else, such as negotiating a mortgage modification or refinancing has failed.
If you're in danger of losing your home, we urge you to seek the help of a reputable credit counselor who belongs to the National Foundation for Credit Counseling, the nation's biggest and oldest credit-counseling organization.
Its 120 agencies abide by a set of professional and ethical standards that have served many individuals and families for almost 60 years.
The fees will be modest, and their experienced credit counselors negotiate with mortgage lenders every day. They'll know what's possible and whether bankruptcy makes sense for you.
Click here to find a credit counselor in your area.
If you decide to go the bankruptcy route, the best way to find an attorney is to go to the American Board of Certification, a nonprofit group that tests and accredits bankruptcy lawyers.