Can I, or Should I save my Home through Bankruptcy?

Most of the Potential Candidates we meet with tell us a sad tale of woe that involves the pursuit of a Loan Modification. That candidate will have applied originally some years ago and been denied on the basis of either being current on the loan or having insufficient income to support the modification.

In the former circumstance, the potential client then intentionally goes delinquent and reapplies. What the client does not realize is that the bank and or servicing company is adding late fees and other charges to the balance owed on the loan. The process for reviewing the modification package is long and thankless. The Potential Client has faxed in countless copies of bank statements, proof of income and all sorts of other nonsensical documents numberous times. The Borrower will receive letters indicating the file is under review and simultaneously also get letters indicating the Bank's intent to foreclose. Eventually, and sadly, the Borrower finally receives a denial letter on the eve of foreclosure and they are faced with a pending Sherriff eviction.

In the latter circumstance, the Borrower is left understandably confused. The Borrower has been rejected for a lower payment on the basis of insufficient income. The Bank then leaves the Borrower at the higher payment. This counter intuitive thinking makes no sense to anyone. If the Borrower cannot afford the lower payment, how is the Borrower supposed to pay the higher payment?

A Bankruptcy filing will stop a foreclosure cold. Once the case is filed, the Borrower is protected by what is referred to as the "Automatic Stay". The rule is essentially that, the Stay is automatic. There is no need to call or write to anyone. Any action taken by the bank or creditor to collect on the debt or foreclose is null and void because of the automatic stay.

The two routes in Bankruptcy available to most consumers are either Chapter 13 or Chapter 7 Filings.

Chapter 13 Bankruptcy: In a Chapter 13 Bankruptcy Filing, we divide the total delinquency by either 36 or 60 (depending on income and level of delinquency) and this constitutes the Borrower's Plan Payment. For example, a Borrower may have a mortgage payment of $3,000.00 and is 16 months behind. This is a total delinquency of $48,000.00. The Chapter 13 Filing will allow the Debtor up to 60 months to pay back this delinquency and thereby save the house.

Chapter 13 will also allow the Debtor, in some cases, to get rid of any 2nd or 3rd mortgages. The code has a provision which allows for "lien stripping" of unsecured debt. Looking at the above scenerio, the Borrower may have had a 2nd mortgage of $245,000.00 and a 1st mortgage of $480,000.00. The property currently has a market value of $430,000.00. We can see that there is no value in the property to support the second mortgage. The Bankruptcy Code will allow the Debtor to file a motion to have the lien removed. Thus, not only does the Debtor get to keep the house, but also will emerge from Bankruptcy owing considerably less on it. Chapter 13 will also allow for the discharge of lots of other types of consumer debt such as credit card debt and medical bills.

Chapter 7: Sometimes a home is so drastically underwater (lacking in value) that no plan payment as above makes sense at all. Inneviatbly, the Borrower is in a situation where they have refinanced the house multiple times as well. In this situation in California, not only will the Borrower lose the house, but the Bank will sell the house at auction and then pursue the Borrower for the deficiency. The deficiency will be the difference between what the Bank recoupes at auction and the total amount owed by the Borrower (principal plus delinquency plus foreclosure costs and legal fees).

This is all very ugly. A Chapter 7 filing will stop a foreclosure sale, as above and also absolve the Borrower of any liability for the deficiency. The Borrower emerges from the Bankruptcy Debt Free.  As stated by the Supreme Court, "A new opportunity in life, unhampered by the pressure and discouragement of pre-existing debt".

In order to determine which path is best for you, it is essential to speak with an experienced San Diego Bankruptcy Attorney. The McMillan Law Group provides up to one hour of free consultation to discuss your situation. Call 858 499 8951 for an appointment.