Due to the hard economic times, our office has been getting an increasing amount of calls from homeowners facing foreclosure on their homes. Many of our clients are surprised to hear that Bankruptcy may be the best (and sometimes, the only) way to defend a foreclosure.
For those clients who want to keep their home, but are struggling with making their monthly mortgage payments, a loan modification is often be a very good place to start. The Federal Government has loan modification programs available, and many lenders have their own in-house loan modification programs for borrowers who do not qualify for Federal assistance.
However, with the exception of certain eligibility criteria established by the Federal modification programs, lenders are not required to give their customers a loan modification. The loan modification qualification process hinges on a very fine balance between a consumer's ability to pay and financial necessity, and many lenders will not even consider your eligibility for these programs unless you are behind on your payments.
A pending loan modification will not stop a foreclosure case from being filed or from proceeding in Court. As the modification process can often take many months to complete, it is not uncommon for borrowers to be denied approval after a foreclosure case has already been filed. With the loan in default and no modification in place, a person may simply run out of time.
For those individuals to whom a modification has been denied or who can now afford to make their monthly payments, Chapter 13 Bankruptcy is often a useful tool to bring a mortgage loan current and/or stop foreclosure. Often referred to as a personal reorganization, Chapter 13 Bankruptcy allows qualifying individuals to repay a mortgage default over a period of 3 to 5 years. While a lender may choose whether to grant a loan modification to its customers, it may not deny a properly proposed Chapter 13 repayment plan. A case filed under Chapter 13 of the Bankruptcy Code will immediately stop a pending foreclosure so long as the property has not yet been sold.
In addition, Chapter 13 Bankruptcy allows for the restructuring of other types of debt, including car loans, junior mortgages, home equity lines of credit, credit card bills, medical bills and more. Under certain circumstances, the Courts will even allow consumers to strip secondary liens from their homes (junior mortgage liens and lines of credit), remove that loan payment from their monthly expenses and repay only a portion of the debt. This type of restructuring can be especially useful when a loan is scheduled to balloon or mature, and refinancing is not possible.
Chapter 13 Bankruptcy is not the right option for everyone. In order for the reorganization plan to be successful, an individual must be able to afford the required monthly payments. If a mortgage loan is significantly in default, or a client is not employed, this can be difficult. Nevertheless, Chapter 13 provides a court-supervised, financial reorganization for qualifying individuals struggling to make it in this difficult economy.
Sometimes, a client can no longer afford to make their monthly mortgage payments or cure an outstanding default. Again, it may be best to begin by working directly with your lender regarding other loss mitigation opportunities, such as a short sale of the property or a deed in lieu of foreclosure. A short sale can occur when the lender agrees to accept less than the full amount due and owing under the current mortgage in a sale of the property to a third party. By contrast, a deed in lieu of foreclosure is a borrower's transfer of his or her interest in the property by way of deed back to the lender so that the lender does not have to formally take back the property through the foreclosure process. Each lender will have their own criteria and requirements for eligibility under these programs, and a borrower may experience some of the same problems as those discussed regarding loan modification. However, while these options often guarantee that any amount due and owing under the loan will be forgiven by the lender, there may be year-end tax consequences as a result of the debt cancellation.
If one or more of these options fail, Chapter 7 Bankruptcy can be used to remove liability on home mortgages and unsecured debt, such as credit cars, medical bills, personal loans, payday loans, cash advances, and more. Chapter 7 Bankruptcy is often referred to as a "liquidation," though in reality, most filers retain all of their personal property. The idea behind this section of the Bankruptcy Code is that individuals with qualifying income are entitled to keep (or exempt) a certain amount of personal property for a fresh start. Property in excess of the allowed amounts may be sold, and the proceeds used to repay creditors a portion of the debt. Certain types of debt, such as auto loans and home mortgages, can be retained post-bankruptcy filing if the loan is current.
It is important to understand that Chapter 7 Bankruptcy will not save your home from foreclosure and will only temporarily suspend the foreclosure case. It will, however, allow you to surrender the property back to your lender pursuant to applicable state foreclosure law without any resulting liability. If a sale of the property returns less than the amount owed on the mortgage, a Chapter 7 Bankruptcy debtor is not personally liable for the balance or any tax consequences as a result of the debt cancellation.
Whether an individual will qualify or benefit from Bankruptcy protection involves the examination of many personal and financial factors, which must be assessed on a case-by-case basis. The lawyers of Franks, Gerkin & McKenna, P.C. have been serving the counties of Boone, DeKalb, Kane, McHenry
*This office is a debt relief agency. We help people file for relief under the United States Bankruptcy Code.
Thursday, February 23, 2012
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