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  • Mary K. Lenahan, J.D., Realtor

Foreclosures up 81% and Expected to Increase – Can Bankruptcy “Save” Your Home?


Altadena, CA Home

Altadena, CA Home

Five Important Facts Homeowners Need to Know About Bankruptcy And An Exception That Could Save Your Home

Foreclosures went up by 81% in 2008 from the prior year, according to data collected by Realty Trac.  With the current tsunami size shift in the world economy, many more foreclosure are expected, despite the good efforts of the Obama Administration to preserve home ownership in America.  

Many homeowners vaguely understand that filing for bankruptcy can “stop” a foreclosure on a debtor’s home.  Homeowners, however, need to ask a more important question: “Can bankruptcy “save” my home from foreclosure?”

The answer to that important question primarily rests upon your ability to continue to pay your home mortgage during a Chapter 7 proceeding, which involves a discharge of most debts, or during a Chapter 13 proceeding, which involves a repayment plan of some of your debts over a 3 or 5 year period. 

The following sets forth five important facts about bankruptcy law that will help you determine whether bankruptcy can “save” your home, rather than just merely delay the inevitable:

1.     A bankruptcy filing will initially stop a foreclosure under the “automatic stay” order by the bankruptcy court,

2.     The automatic stay order will only temporarily stay a foreclosure if you are not current on your mortgage (Chapter 7) or, you cannot show that you can pay your monthly mortgage and make payments on the missed mortgage payments during the proposed repayment period (Chapter 13):

3.     In order to keep your home through bankruptcy:

A.    Under Chapter 7

1.      You must be current on your mortgage

2.     Your equity must not significantly exceed the state exemption amount on homes

B.     Under Chapter 13

1.     You must set forth a repayment plan to repay any missed mortgage payments over a 3 or 5 year repayment plan, and you must be able to pay your current monthly mortgage,

4.     Generally a bankruptcy court is prohibited from modifying terms of a mortgage secured by a primary rescidence under either Chapter 7 or in Chapter 13 bankruptcy, and

5.     There is an important exception to the general prohibition against modifying mortgages on a primary residence that apply in a Chapter 13 proceeding.   

This important exception applies where the fair market value of the home is less than the principal of the first mortgage.   When this exists, junior liens, such as a 2nd mortgage or equity line of credit on a home can be stripped off.  These debts are reclassified as unsecured, which may, or may not be paid in part or full during the Chapter 13 repayment plan.

Bankruptcy is valuable remedy that should be used only after much forethought.  There are many factors to examine when considering bankruptcy, other than and in addition to the house. 

******
This article is for general information on the laws and does not constitute legal advice.  The above may be helpful to you when discussing your circumstances with legal counsel in your state who can advise you on the particulars your circumstances and of any new laws, local laws, and court holdings.

Namaste,

Mary K. Lenahan, Esq.

 

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