Deciding on whether or not you should keep a home in bankruptcy
Bankruptcy provides the option of keeping your home or walking away from it, whether you are current on the payment, or months behind. Sometimes this is an easy decision. If you love your home and want to live there the rest of your life, and you are current on the payment... of course you will stay. If you are six months behind on a home that you only purchased to make your ex-husband happy... you can go. But, sometimes there are situations that fall between these two extremes that are not so clear cut.
The bankruptcy discharge can eliminate your personal obligation on your mortgage loan. The "mortgage" is your obligation to pay, while the "deed" lists who has ownership rights. By wiping out your personal obligation, you eliminate the possibility of the mortgage company suing you for any deficiencies and penalties. This is very important if your home is going up for sheriff sale auction. Homes often sell far below their normal value in a sheriff sale, and this can leave you with a huge deficiency on what is owed. Bankruptcy is a great way to get out from under this obligation.
At the same time, Chapter 13 bankruptcy can be used to catch up on arrears on your home when you have fallen behind on the payments. The arrears are caught up over three-to-five years, and paid without interest. This can even save a home on the brink of a sheriff sale. As long as you have the income to save it, you can catch up on large arrears.
The dilemma arises when you are somewhere in between these extremes. For instance, you may be 6 months behind on a house you like, but you were having difficulty making the payment to begin with. Or maybe your payment is current, but the home needs major repairs. Deciding whether or not you want to keep the home in these situations can be a difficult decision. Here are some things to consider:
- How much equity do you have in the home? If your home is "under water" (that is, you owe more than it is worth), you should consider surrendered more that if you have a lot of equity. If you have equity, you should be everything you can to salvage the home, even if you just want to resell it yourself (remember, sheriff auctions often fetch ridiculously low bids)
- Can you realistically afford the payment going forward? You have to think long and hard about whether making the monthly payment will be feasible over the coming decades. This can be a hard reality to face, but living in a less expensive home can make life a lot easier. You don't want to be "house poor".
- Do you have other living options? Have you considered moving back with your parents or a roommate? Do you have a good rental lined up? It is easier to walk away when your next move is planned.
- How much do you love your home? If you really love it, and you can afford it going forward, you should stay! Sometimes people fall behind their mortgage because of a temporary loss of income. Once you are earning again, you can often afford to keep your home in Chapter 13.
- Does the home need major repairs? If repairs for foundation or structural damage are too great to finance, it is often times to walk away.
Keeping their home is often a first priority for my clients. If you have the income to afford the payment, you can always keep it in bankruptcy. But, if you are questioning whether it is worthwhile, contact us to discuss your options.