Bankruptcy Options When You Are Behind On Your Mortgage

Many individuals end up in my office when they fall behind on their mortgage. It is a common problem. The most frequent cause is a temporary lose or reduction in employment. Several months of unemployment can quickly lead to a family facing a foreclosure, which are sometimes filed within 3 months of the first missed payment. Fortunately, the Bankruptcy Code can help, whether you want to save the home you have fallen behind on, or if you simply want to walk away from it.

What if you are behind on your mortgage, and you don't want to stay in the home? Chapter 7 bankruptcy can help. When a debtor falls several or more months behind on a mortgage, a foreclosure proceeding will often commence. A foreclosure allows the lender (usually a bank or mortgage company) after a series of court filings, to seize the home, sell it at auction, and then go after you personally if the sale price does not cover all of the mortgage and expenses. Certain lenders and law firms specialize in doing just this.

Homes often sell for very low prices in these sales, and if the mortgage was large, this could lead to a huge "deficiency judgment" against you. The lender will be able to put liens on your property (or future property) or even freeze your bank account. And these deficiency judgments do not go away. However, Chapter 7 bankruptcy can wipe out these deficiency judgments, no matter how large they become. When there is a large deficiency, bankruptcy may be the only option allowing you to go on with your financial life. The process is very straightforward, and you can even continue to live in the home until it is sold at auction. This is often months down the line. As long as you are willing to ultimately surrender the home, Chapter 7 bankruptcy is the perfect option.

On the other hand, what if you are behind on your mortgage and you want to save your home? You will need to file a Chapter 13 bankruptcy. Chapter 13 bankruptcy is more complicated, but it has many benefits. You can catch up on mortgage arrears by paying them back over 3 to 5 years, without interest or further penalties. Spreading out the amount owed over a period of 60 months can make repaying even large arrears feasible. For instance, if you are one year behind on a $1,000/month mortgage, you can catch up the arrears for $200 over 5 years. While this may not be possible if you have not started working, it is often very workable when full employment returns.

Another important feature of using Chapter 13 bankruptcy when you are behind on your mortgage is that it can stop a sheriff sale up until the very moment the gavel goes down, and it does not require negotiation with the lender. Loan modifications are often endless (and useless) endeavors. However, under Chapter 13 bankruptcy, there is no such negotiations. As long as the lender is paid under the terms of the mortgage, and all arrears are accounted for, they must accept the filing. Chapter 13 bankruptcy can help in all but the most hopeless situations.

Contact us if you have fallen behind on your mortgage and you wish to discuss your options. Whether you want to save your home, or surrender it, bankruptcy has an option for you.

Should I Stay of Should I Go?

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.

Stopping a Sheriff Sale with Chapter 13 Bankruptcy

The culmination of the foreclosure process is the sheriff's sale. It is the final step where your home is literally taken from you and sold to a third-party. The very idea is terrifying to contemplate...someone else taking possession of your home. Fortunately, right up to the moment the sale occurs, Chapter 13 bankruptcy can be used to save your home.

How does Chapter 13 bankruptcy fix this dire situation? The Bankruptcy Code "automatic stay" stops the sheriff sale from proceeding. The automatic stay prevents creditors from taking any legal action (or continuing any legal action) against a debtor. Once the actual sheriff sale takes place, it is too late. The automatic stay only stops sheriff sales that have not yet happened. But, if a Notice of Bankruptcy is properly forwards to the sheriff's office before the sale occurs, it should be stopped. (NOTE: It is important to not wait until the last moment, as the complicated requirements of Chapter 13 bankruptcy and the need to serve the sheriff may make last second filings impossible.)

But, the automatic stay alone does not save your home from sheriff sale. If you cannot submit a feasible Chapter 13 bankruptcy plan, your case will be dismissed, and the sheriff sale will again go forward. In order for your Chapter 13 plan to be considered feasible, you will need to show enough income to catch up on all of the arrears, legal fees, interest, and penalties, as well as show you will be able to make the payment going forward.

Chapter 13 bankruptcy is often a great option for individuals who lost their job or source of income for a period of time, subsequently fell behind on their mortgage, but are now at full income once again. Chapter 13 bankruptcy will allow all of the arrears, fees, and penalties to be cured (without interest) over a 3-to-5 year plan. No interest is an important key. If you are $6,000 behind on your mortgage, you can catch up on the arrears for roughly $100 per month over 5 years.

Now, penalties and fees may increase the amount owed, but they too are paid without interest. In any case, Chapter 13 bankruptcy allows many individuals to keep their homes long after they stopped believing it was possible.

An important side note about attorney fees for the banks and mortgage companies.... they are allowed by law to add-on additional fees after a sheriff has been actually scheduled. So, if possible, you will want to contact us before the sheriff sale is scheduled, to avoid as much in the way of fees as possible.

I am an experienced Pittsburgh bankruptcy attorney who would be happy to speak with you during a free consultation to discuss whether saving your home through Chapter 13 bankruptcy is an option. Don't wait until it is too late, call today to save your home.