Bankruptcy and Keeping Your House

September 26, 2012

If your financial position is becoming precarious, and there never seems to be enough money anymore, a bankruptcy may be the solution.

For situations that are truly desperate, a Chapter 7 may allow you to discharge practically all of your debts and start fresh.

If things have not grown quite that dire, a Chapter 13 may allow you to restructure much of your debt, and regain financial stability.

What If You Own a Home?

Homeownership and bankruptcy is a complex scenario. Because of the variability of the circumstance, your best option is to contact a bankruptcy attorney, who can review your specific situation and can explain what options are open for you.

Generally, a Chapter 13 is best suited to helping a borrower with a mortgage. Because you cannot "cram down" the loan value to the current value of the house, if your home is significantly underwater, you should examine the financial viability of remaining in the home.

If you have ties to the community, (your children are enrolled in local schools) and you plan on remaining for many years, a Chapter 13 can allow you to recover from mortgage arrears, by allowing you to repay the deficit over a three- or five-year period. You may also be able to reorganize your other debt, like equity loans or credit cards, and regain a better financial foundation.

Equity Loans?

If you are significantly underwater and you have a home equity loan, you may be able to discharge the entire amount and strip the loan from your home. This occurs when the value of the home declines to a point where the house is worth less than the primary mortgage.

This leaves the equity loan with no security interest with which to attach, and makes it functionally similar to unsecured credit card debt. A Chapter 13 allows much unsecured debt to be discharged.

The Value of Reorganization

Another benefit of Chapter 13 is your ability to eliminate or greatly reduce much of your unsecured debt. This makes available the cash you had used to pay all those bills and use it to focus on the repayment of core debts, such as your house, car and student loans (which typically are non-dischargeable).

This can go a long ways towards making a mortgage payment more affordable and permit you to avoid having to leave your home.

Article provided by Daniel Hoarfrost, Attorney at Law
Visit us at www.danielhoarfrost.com/