So your low adjustable rate mortgage has increased to market rates and you can't afford the new payment without missing meals or going without gasoline. You've spoken with your lender and there's nothing they can do for you. Refinancing the adjustable rate mortgage won't help and the fixed-rate terms are just as onerous. Perhaps you've already skipped a credit card payment (or even two or three) to divert the funds to the house payment. Or perhaps you've been taking cash withdrawals from your credit cards to have enough to make the house payment. Paul is getting what's Peter's but that still isn't enough because the snowball of debt-disaster has already begun. When you already can't afford your present lifestyle, going further into debt is not a financial sound response under almost any set of circumstances. Most people know this intuitively, but desperation often creates almost irresistible pressure to do 'something?, even if it's the wrong thing! Here are some things to consider before you start selling assets at a deep discount or taking cash withdrawals from your retirement accounts:
So-called debt relief agencies advertise relentlessly, but can't really help you with your mortgage payments, nor with any other secured debt (cars, furniture, computers, appliances, etc.) for that matter. They attempt to reduce your monthly cash outlay for unsecured debt (credit cards, medical expenses, judgments, etc.). Many are outright shams and require you to default on all of your credit cards before they make an attempt to 'settle' with them. This makes your credit worse ? not better ? and only temporarily forestalls the inevitable. Many take a hefty slice of your monthly payments or take a fee before sending anything to your creditors. Many people have credit card issues along with their home or car payment problems and where that is the case, you will generally be further ahead sooner without relying on these agencies.
Many folks facing foreclosure or repossession (in the case of vehicles or mobile-homes) will eventually consider whether bankruptcy may afford them relief from debt. Notwithstanding all the hoopla over the toughening of bankruptcy laws in 2005, for the most part, a non-serial-filer has the same rights under the new law as under the old law. However, the purpose of this article is not to discuss relief from debt, as such, but rather, how bankruptcy ? chapter 13 bankruptcy in particular ? may be used effectively to save your home in the first place, rather than dealing with the question of any deficiency remaining after a foreclosure sale. There are many non-bankruptcy considerations to face before making this decision: Can you accept the fact that circumstances ? some of which may have originally been under your control ? now place you in the position of having to ignore some or most of your just debts? What will those around you who know or discover the bankruptcy think about you? Can you deal with the inability to obtain unsecured credit for 6 ? 18 months after filing? Will you have to deal with a specific creditor in the future where they have received less than 100% of what they are owed? Although Chapter 13 is designed to permit the retention of secured debt, it is most often the case that such retention is at the expense of unsecured credit in the same way that a filing under Chapter 7 does away with unsecured debt. In other words, it may be easier to justify saving your home or vehicle through Chapter 13 than to file under Chapter 7 and perhaps just walk-away from these debts (along with the collateral, of course), but most creditors do NOT differentiate between forms of bankruptcy when they ask if you have ever filed bankruptcy before.
If these important status questions can be answered in a manner that still supports your moving forward with a bankruptcy filing, then there are some other bankruptcy-related questions to consider before going ahead with the filing. Answering these questions requires taking a really hard look (and I mean a really hard look) at your current and projected financial situation and answering the following:
A. Is your home:
(1) simply convenient as a place to live;
(2) necessary to your employment; or
(3) is it critical to who you are as a person or as a family?
B. Do you have any 'equity' in the home and if so, would you be able to walk away with anything if you sold it quickly for 90% of its probable value, after considering the costs of sale, including commissions (another 7% - 8% reduction)?
C. Could you find a place to rent that would be suitable for you and your family within 6 months?
D. Are you expecting a meaningful increase in income during the next 6 months?
E. Are there aspects of your current lifestyle, i.e. spending, that you could control so that you could afford the new payments (smoking, gambling, overspending, cable-TV, etc.)?
F. Is the amount of your other secured loans (cars, furniture, computers, etc.) more or less than the fair value of these items if sold today to a willing buyer?
Now then, if you are so emotionally invested in your home that you cannot bear the thought of moving ? let alone being kicked-out of it, or if this home is critical to your continued employment at a job that cannot be replaced within 6 months, then serious action to retain the home at nearly any cost will have to be considered. Similarly, if you have 'net equity' in your home even after reducing its probable value by 20%, or reasonably expect an increase in income sufficient to allow you to make the revised payments, these same actions may make sense. On the other hand, if the home is merely a convenience that can be replaced by finding somewhere to rent or if you have little or even no real equity in the home, the considerations are somewhat different. In the latter case, you may do better simply waiting out the foreclosure, living in the home cost-free for whatever amount of time your particular State offers as its redemption period and then filing Chapter 7 bankruptcy to eliminate any deficiency if the foreclosure sale does not satisfy the mortgage in full (or if there are other reasons to file at that time or before ).
This article, once again, is not about how to avoid debt ? but how to save your home. The following discussion will not be successful in every case and you should ? without exception, consult with competent bankruptcy counsel before embarking on any bankruptcy filing course.
Chapter 13 of the Bankruptcy Code is a 36 ? 60 month debt-repayment plan which operates like a debt-consolidation loan. All of your non-mortgage debt is combined into one single (or, sometimes, more frequent) monthly payment made to a Bankruptcy Trustee by means of a wage-assignment or direct-payment mechanism if you are not employed for wages. The Trustee is entitled to receive a 6% - 10% commission paid out of your monthly payments and the balance is most often paid on a pro-rata basis to those of your creditors who have timely filed claims with the bankruptcy court within the 90-day period allowed for most claims. There is no 'magic percentage' that must be paid to creditors under the Bankruptcy Code, but the payments you make must equal ? where your creditors will not be paid in full ? all of your 'disposable net income' during the term of the Plan. The term 'disposable net income' means the amount left-over from your gross income, minus tax withholdings, after subtracting your regular home mortgage payment(s), real estate taxes and insurance, utilities, home maintenance, food, clothing, medical/health insurance premiums & out-of-pocket expenses, non-debt costs of transportation (gas, oil, maintenance, bus-pass, etc.), vehicle insurance, charitable contributions, alimony & child support payments, and certain allowances for recreation, school expenses, tuition, and other justifiable expenses. Payments on secured loans (vehicles, furniture, computers, etc.) are not included as expenses deductible from income ? only the home mortgage payment(s).
Most Chapter 13 Plans are set up so that the claims of secured creditors are paid ahead of the claims of unsecured creditors. Thus, if you have one or two vehicles with loans on them, they will be paid before your credit card creditors. This is because these secured creditors are entitled to be paid interest on their claims while the holders of unsecured claims generally are not. Often, Plans are established so that the claims of tax creditors (which may have a priority over unsecured creditors as well) and the amount of any delinquency on your mortgage, are paid concurrently with the payments to secured creditors, each receiving a portion of the payment. Student loan obligations, though not dischargeable in bankruptcy, may be included in the Plan and paid as an unsecured debt (i.e. only a portion being paid during the Plan), but after the Plan, the balance remaining, including accrued interest, will still be owed.
So how does all this help you save your home? Here's how in a 'nutshell?:
1. Payments on your credit cards and other unsecured payments cease immediately thereby freeing-up dollars that would otherwise have gone to these creditors which may then be used under the Plan.
2. If the value of your secured personal-property collateral (vehicles, computers, furniture, etc.) is LESS than the amount of the debt against them, then the Plan needs only to pay the VALUE of the collateral with interest ? and you may be able to determine the interest rate in the Plan at a rate lower than what the creditor is presently charging you. This will also free up cash that would otherwise have been used to pay these debts in full. To pass muster under the bankruptcy laws, the value of the collateral must be paid in full, with interest, during the term of the Plan, along with any 'priority tax debts?.
3. If you are delinquent on your home mortgage, the entire delinquency (including costs of collection to date) may be repaid in monthly installments as part of the Plan over as long as the full term of the Plan, if necessary. The original mortgage is reinstated in full even if it has been accelerated under the terms of the mortgage or the property is already in the process of foreclosure, and you simply continue or resume making your regularly scheduled payments to your mortgage lender as of a date not more than 30 days after the filing of your Plan. This is called the 'cure' provision of Chapter 13 and it may be used to 'save' your home right up to the time the home is sold at a sheriff's sale or otherwise as long as you still have a legal interest in the property.
At the end of the term of your Plan, you will be essentially debt-free, except for the remainder of your mortgage which will be paid by you in the ordinary course!
Now this is not the end of the story. Here are the caveats:
1. If your mortgage has already expired of its own terms prior to the commencement or during the pendency of the case, or if it will expire before the end of the Plan term, your right to 'cure' the mortgage default will be limited by the jurisdiction in which you file. Some bankruptcy courts will allow (or require) the entire balance of an expired mortgage to be paid in full, plus interest, over the term of the Plan (maximum of 5 years). Some courts will require a balloon payment with the expiration of the loan at the end of the contractual loan period (3-years for example) regardless of the term of the Plan. Some will say you cannot 'cure' an expired mortgage at all. You will need to check with an attorney competent in Chapter 13 bankruptcy law before filing if there is an issue of the mortgage term expiring within 3-5 years of the filing.
2. Chapter 13 does NOT change your mortgage payment or extend the term of your loan. It just reinstates a mortgage that is in default. Thus, if you could not afford the payment before filing, the only way you will be able to afford it after filing is to modify your budget to reduce other monthly expenses or by obtaining additional income for use in paying the mortgage. The ultimate challenge is whether you can save enough by using the provisions of the Bankruptcy Code to reduce your outlay to other creditors sufficiently to enable you cure any mortgage loan delinquency. If you simply can't do this because your funds just won't go that far, then ? and only then - do you need to consider either not saving the home, selling assets or finding a supplementary source of income sufficient, when added to your other income, to meet these overall income and payment requirements.
3. Your retirement benefits are completely exempt from the claims of creditors whether or not you are in bankruptcy. They are protected and safe. Keep them that way. While there could be some circumstances that would warrant the use of these funds and the suffering of the 10% tax penalty , to preserve your home, these circumstances are very few and far between and should never be considered without the advice of a true credit-counselor (not a debt relief agency) or your attorney.
Avoiding the loss of one's home is generally second only to avoiding the loss of one's life or the life of someone close. It is an emotional nightmare for many, especially those with little or no prior knowledge about the option of Chapter 13 bankruptcy. Your creditors generally don't like to deal with payments under Chapter 13 and the threat of filing may provide some window of relief. However, as is the case in any adversary situation, 'the best defense is a often a good offense?.
Mel Hoffman, J.D. © 2006
