The automatic stay is a powerful benefit of filing a bankruptcy case. As soon as the stay is effective, your creditors are prohibited from taking further collection actions against you.
As a result, a bankruptcy filing can be helpful when you are facing financial emergencies, including:
If you are planning to file for bankruptcy protection, you may be worried about what will happen to your home. Bankruptcy law provides a debtor with numerous exemptions which safeguard assets from being included in the bankruptcy estate. Additionally, many debtors do not realize that their real estate can be positively affected by your filing.
A debtor who owns a home with more than one mortgage on it may be eligible to strip the inferior lien on it. To take advantage of the lien stripping process, you must be “underwater” on your mortgage. In other words, the value of your home must be less than what you owe on your first mortgage loan. The argument is that the home does not have sufficient equity to support the second (or third) mortgage loan, so the inferior liens should be treated as unsecured debt, which effectively strips the lien from your home.
In some cases, a debtor may be able to negotiate better contract terms with their mortgage lender. Most commonly, you can lower your interest rate or re-amortize your mortgage loan. This could result in you having a lower monthly payment which, in turn, can help you afford to keep your investment property.
If you are underwater on your home and you want to get out from under the debt, a debtor is allowed to surrender the real property back to the mortgage lender. The surrender is treated as “payment in full” because any remaining balance is treated as unsecured debt. If you file a Chapter 7, your unsecured debt is usually discharged or eliminated in full. In a Chapter 13 case, your unsecured creditors are typically paid a very small percentage, if anything, on what is owed.
Distressed homeowners in the Northern District of Florida now have an additional option to try and keep their home.
The court’s Mortgage Modification Mediation service allows homeowners, and lenders, access to experienced Chapter 13 mediators at a reduced cost. Although the parties are not required to reach an agreement, courts are generally much more inclined to enforce agreements between the parties as opposed to imposing their will in a given situation.
The plan is designed to streamline the process, reduce time and, above all, get the parties talking.
The normal loan modification process can be frustrating, to say the least. By most accounts, at least 80% of eligible homeowners are denied mortgage modifications by their lenders. Although there are no hard numbers, and no guarantee of success, these statistics are often reversed in mediation.
There are two primary reasons for the big difference in results:
Dialogue: Only about a third of at-risk borrowers are even in regular contact with their lenders. Although an open dialogue is no guarantee of success, a nonexistent dialogue is a guarantee of failure. You don’t get anything unless you ask.
Good faith negotiation: The largest single reason for denial is failure to timely submit all required documents. While a bank may very well deny a loan modification because one form was one day late, such a stance is not a “good faith” denial under the law. The rule of thumb is that if the bank cannot issue a denial based on anything other than a technicality, there is no good-faith basis for the denial.
A previous post discussed some of the general aspects of a Chapter 13 Bankruptcy plan. For homeowners who are delinquent on their mortgages, the amount to be repaid may be substantially lower than the amount the moneylender claims that you owe.
Most mortgage companies are upfront and evenhanded when dealing with their customers. However, it is not uncommon for mortgage companies to charge some outlandish fees, such as:
Excessive application fees
Property inspection fees
Be on the lookout for such fees, and question them if they pop up. An attorney may also be able to argue that such fees are not reasonably related to the mortgage transaction, and have these fees stricken from the delinquency amount.
Avoiding the lien
Ask your attorney about some lien-reduction options that may be available. In some jurisdictions, you might file a motion to avoid the lien and dramatically reduce the past-due amount:
Cram-down: In some cases, you may be able to repay the current Fair Market Value of an item as opposed to the contract price. For example, if you bought a house for $100,000 but it is now only worth $80,000, you may be able to cram down the mortgage $20,000.
Strip-off: If there are multiple liens on a house and the FMV is too low to secure both lies, the junior lien may be subject to removal. Many people who bought real estate with an 80/20 financing package may be in this situation.
Statute of limitations: A Texas court has held that if a lender sends an acceleration notice but fails to foreclose within the proper time period, the lender has forfeited its right to foreclose on the note.