Don't Walk Away, Consider Bankruptcy

August 11, 2010

Between the current economic crisis and the collapse of the housing market, many homeowners find themselves either in a home they cannot afford or in a home that is not worth as much as they still owe. In either case, many borrowers may think handing over the keys and walking away is the best option - this may be a mistake.

Fannie Mae's Tougher Penalties

In October, Fannie Mae will begin increasing the penalties for borrowers who strategically default on a mortgage. A strategic default occurs when a borrower walks away, for whatever reason, from property and a mortgage that the borrower still has the ability and capacity to pay. Most borrowers who choose to engage in a strategic default do so because they calculate that it will take too long for the home's value to surpass the amount they still owe on the mortgage.

As Daniel Smith of First Place Bank states: "We need to start treating bad behavior with serious and measurable consequences so that we can get this nation back on its feet."

Borrowers that Fannie Mae finds to have strategically defaulted will be barred from obtaining a loan through or backed by Fannie Mae for seven years; formerly, strategic defaulters were penalized for five years.

However, if a borrower can prove extenuating circumstances or hardships or that they attempted to work out an alternate agreement with the loan servicer, the penalty may be reduced to three years. If a borrower attempts a short sale or deed in lieu, the penalty may be only two years.

Mortgage lenders will determine if borrowers are in default by looking at:
- The ability to pay off debts
- Credit access

More importantly, Fannie Mae suggests that it may even pursue deficiency judgments against strategic defaulters; paving the way for the association to acquire the borrowers' other assets to recoup the outstanding debt. Just because lenders file for foreclosure, doesn't mean it cannot go after borrowers' bank accounts.

Fannie Mae may target individuals they feel can still pay their mortgage. Others who have lost a job or experienced significant changes in economics, yet still possess assets, may be targeted by the new rules as well.

Before borrowers just hand over the keys to the property, they need to speak with an attorney. There may be another way to handle the situation - filing for bankruptcy.

Bankruptcy Options

If Fannie Mae decides to seek deficiency judgments against borrowers, certain assets of the borrower are fair game. To protect those assets, borrowers may be able to file for Chapter 13 bankruptcy protection.

Chapter 13 bankruptcy - also called wage earners' bankruptcy - is geared toward those in debt who still have a regular income. Based on this regular income, a plan is devised to repay most of the debt over a three to five year period.

One of the major benefits of Chapter 13 bankruptcy is that Chapter 13 bankruptcy offers filers the opportunity to save their homes from foreclosure. The repayment plan of Chapter 13 bankruptcy offers filers the opportunity to catch-up on delinquent mortgage payments.

Other possible benefits of filing for Chapter 13 bankruptcy include:
- Rescheduling secured debts over the duration of the repayment plan - which may lower monthly payments
- Consolidating loan payments - filer only pays one monthly payment to a trustee who then pays the creditors
- Protecting co-signers on loans
- Stopping creditor harassment

At the end of the repayment plan, debts covered by the Chapter 13 bankruptcy are discharged. This has the practical effect of barring creditors from seeking or continuing to seek any repayment for any debt still owed after the discharge.

To be eligible for Chapter 13 bankruptcy the debtor cannot have more than approximately $360,000 in unsecured debts and approximately $1,000,000 in secured debt. (It is important to consult an experienced bankruptcy attorney as these numbers are adjusted periodically.)

If a debtor does not qualify for Chapter 13 bankruptcy, a debtor may be able to file for Chapter 11 bankruptcy. Chapter 11 bankruptcy - frequently called reorganization - is generally geared toward businesses and partnerships and allows them to stay in business while paying off debt over time. Individuals can also file for reorganization under Chapter 11 bankruptcy. This is particularly important for debtors who exceed the debt limits of unsecured and/or secured debt to qualify for Chapter 13 bankruptcy.

The combination of the economic crisis and the housing bubble has been detrimental to many families, even those classified as middle or upper class. However, just walking away from your home may not be the answer. In fact, you may face serious consequences as a result of Fannie Mae's impending penalties.

To discuss your options, including bankruptcy, speak with an experienced bankruptcy attorney today.

Article provided by Green & Kapsos Law Offices, L.L.C.
Visit us at www.greenkapsos.com