October 22, 2014

File Bankruptcy if You are not Broke? Maybe Not Such a Crazy Idea

owe too much on mortgageThe Atlanta Journal Constitution ran a front page story on Sunday, April 14 entitled More than 40% of Georgia Homes Underwater.  The AJC reporter notes that “there’s not another metro area in the United States with as many concentrated pockets of mortgage holders who are underwater in their homes.  No place else comes close.”

Your house is considered underwater if it is worth substantially less than what you owe.  From the mid-1990’s through the mid-2000’s, home values in metro Atlanta rose and mortgage lenders offered outrageous deals to encourage residential purchases.  It was common to see interest only loans or 100% financing which required nothing down from the purchaser.

As long as home prices kept rising, you could refinance over and over, and even take cash out.  Rising prices minimized the risk to lenders so loan underwriting standards were lax.  I regularly spoke to potential bankruptcy clients who earned $50,000 to $70,000 annually but were living in $350,000 to $400,000 homes.  They were meeting with me to deal with excess credit card debt – in many cases, these folks kept their expensive homes even while filing bankruptcy.

When the real estate market crashed in 2008, your home value may have plummeted, but the mortgage obligation remains.  Thus, as the AJC points out, there are many areas in metro Atlanta where homeowners are making mortgage payments on homes that may never increase in value to the balance on the loan – the mortgage is kind of a permanent rental.

So, you may find yourself in a frustrating situation where you make enough money to cover your monthly expenses and pay your mortgage(s) but because your home is worth far less than you owe, you are stuck with a house you cannot leave.

What are your options if your house is underwater?

First, you can try to ride out the storm by continuing to make the payments with the hope that your property value will someday increase.  If you like your neighborhood and plan to stay, or if your are within sight of break even, this may be your best option.

A second option is to simply walk away and turn the keys back to the bank.  This option has some risk because the mortgage lender does have the legal right to sue you for breach of contract.  If the lender forecloses, it can pursue a deficiency balance claim, or, if the lender chooses not to foreclose, it can simply sue you on the note to get a judgment.

In recent years I have not seen much inclination by banks and mortgage lenders to pursue claims against homeowners, but that could change.  You could walk away today and find yourself with a lawsuit at your door in 5 years.  Further, walking away from a mortgage will damage your credit profile severely.

You can try to convince the bank to accept less than the amount due as a payoff if you receive a purchase offer.  This is called a “short sale” and in certain circumstances mortgage lenders will accept short sale offers.  You will have to fill out reams of paperwork and wait for a decision, and you may still end up owing a balance and/or find yourself with a debt forgiveness tax bill.

The bankruptcy process offers additional options that can produce predictable and definitive results.  And you do not have to be down to your last dime to file bankruptcy – it offers a much broader form of relief than it once did.

If you file Chapter 13, you can surrender your home and walk away, while paying back your other debts 100% if you wish or less than 100% if you qualify.  Your lender becomes an unsecured creditor whose claim will be treated like every other unsecured debt and discharged, and there are no debt forgiveness tax penalties in a bankruptcy.

If you qualify for Chapter 7, you can surrender your home and walk away, and your unsecured mortgage balance will be discharged when your Chapter 7 discharge is issued – usually about 5 months after filing.  A discharged debt can never be collected, and you can move on with your life.

If you have a first and a second mortgage, bankruptcy also offers an opportunity to strip away your second mortgage.   Available in both Chapter 7 and Chapter 13, a lien strip can work if your home is worth less than the payoff balance on your first mortgage.   A lien strip thus offers a process whereby you can keep your home but reduce the total balance due by eliminating the second mortgage.

You cannot strip away or modify a first mortgage, but you do have options with your second mortgage.

While it may seem odd to consider bankruptcy if you are earning enough money to pay your bills, Chapter 7 or Chapter 13 may function as method to solve your underwater mortgage problems.  Bankruptcy may be a viable option or not – but you won’t know if you don’t call.  If you’d like to learn more about your bankruptcy and non-bankruptcy options, please contact Jonathan Ginsberg or Susan Blum at 770-393-4985 or contact us by email at ginsberg.bankruptcy (at) gmail.com.

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Jonathan Ginsberg represents honest, hardworking men and women in the Atlanta area who need personal bankruptcy protection. In practice for over 25 years, Jonathan teaches bankruptcy law and practice at legal continuing education seminars and he is a founding member of the Bankruptcy Law Network. Jonathan lives with his wife and children in Atlanta.
About Jonathan

Jonathan Ginsberg represents honest, hardworking men and women in the Atlanta area who need personal bankruptcy protection. In practice for over 25 years, Jonathan teaches bankruptcy law and practice at legal continuing education seminars and he is a founding member of the Bankruptcy Law Network. Jonathan lives with his wife and children in Atlanta.

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