Almost one out of five people going through the required credit counseling prior to filing bankruptcy are now doing so in order to avoid foreclosure. Considering that the home is usually our primary asset, homeowners should in almost all cases seek legal advice prior to foreclosure. Every homeowner facing foreclosure should at least have a basic understanding of the foreclosure process, the timetables involved, their rights as well as their obligations and potential liabilities before and after the foreclosure. An understanding of the foreclosure process will give the homeowner a realistic view of how much time they have to come up with a solution that will stop foreclosure; or, in the alternative make them understand the futility of saving a home they can no longer afford.
If a homeowner gets behind in mortgage payments, a lender will necessarily take steps to foreclose on the mortgage. This does not happen overnight so it gives the homeowner a few months to work out a solution with the lender. Homeowners may have several possible solutions presented to them including: loan modifications, loan forbearance, short sale or deed in lieu. These are choices that are available to a homeowner but it is also important to understand that the success of these solutions is not solely within the control of the homeowner alone. These solutions will require the consent of the lender who may or may not agree to do so.
In a scenario where the lender refuses to cooperate with the homeowner in finding an acceptable solution to the homeowner problem, what is the homeowner’s alternative? This would be a good time to consider bankruptcy as a possibility for avoiding or stalling foreclosure.
A homeowner can file either a Chapter 7 or Chapter 13 bankruptcy.
Some homeowners will do whatever they can to save their home. If this describes you and you are already behind in your mortgage payments with no way to catch up on your arrears, then you may want to consider a Chapter 13 filing. A Chapter 13 bankruptcy allows you to save your home by giving you time to pay off your mortgage arrears with a repayment plan over a 3 to 5 year period. Furthermore, a Chapter 13 filing may also help eliminate the payments of your second mortgage or home equity lines of credit. That’s because with the depreciation in home values, many second mortgages on homes are no longer secured. This allows the Chapter 13 court to “strip off” the second mortgage and classify it as an “unsecured debts” which gives these debts last priority to be paid back. The result is that these second mortgages will have the same last priority as your unsecured credit card debts. The Chapter 13 repayment plan normally require you to only pay off a portion of these unsecured debts over the three to five year repayment plan period. At the end of your repayment plan, these unsecured debts will be discharged and you will only be left with the primary mortgage as your obligation.
On the other hand, it may be your case where you will have no choice but to give up your home no matter what. If so, then a Chapter 7 bankruptcy filing will at least delay the sale and give you a few more months to stay in your home and save up some money during the process. As you do not need to pay the mortgage while bankruptcy is pending, you can set the mortgage money aside as savings. During the pendency of the Chapter 7 filing, you can live in your home rent-free and mortgage-free at least for a period of time while the bankruptcy is pending, and maybe even several more months after your case is closed. You can use whatever money you save during this period to later on secure new shelter. Furthermore, a Chapter 7 filing will wipe off any second mortgages or home equity lines of credits, as well as any other unsecured debts you may have such as credit card bills or medical bills. The Chapter 7 filing then gives the homeowner a chance to start all over again with no credit obligations instead of continuing with the credit obligations they can no longer afford to pay.
The bottom line is that homeowners just need to know what benefits and protections the law gives to them as debtors. This knowledge gives homeowners choices, which they can use for their financial benefit. Bankruptcy is undoubtedly one of these options. However, which option is better depends on the homeowner’s individual situation. There is no single solution to every debtor’s problems. The best thing to do is not to ignore one’s financial problems until it is too late. One just needs to know what one’s rights, obligations, and options are as a debtor; and, to act sooner rather than later.
(DISCLAIMER: material presented above is intended for informational purposes only. It is not intended as professional advice and should not be construed as such. Rey Tancinco is a partner at Tancinco Law Offices, a professional corporation with offices in San Francisco, Vallejo, and Manila. The law office website is at: tancinco.weareph.com/old. Rey Tancinco can be contacted at (800) 999-9096 or (415) 397-0808 or via email at: attyrey@tancinco.com
