Bankruptcy And Mortgages

Bankruptcy and mortgages covers a lot of ground,

Bankruptcy And Mortgages
Bankruptcy And Mortgages

this may be a two-parter.

Chapter 7 Bankruptcy and Mortgages

Mortgage just means debt secured by real estate.  Home equity loan is just a marketing term, if you pledged your house as collateral, it is just another mortgage.

As I am licenses in Michigan, Michigan is the state law this post will follow.  Mortgage law is property law is state law, so your mileage may vary.

When you got your mortgage, you signed a paper pledging your home to secure the loan, and, a promissory note to pay the money back at some interest rate over some period of time with some monthly payment.

When you get a bankruptcy discharge, your personal liability on the note is gone, but the lien on your home remains.

Most folks who file Chapter 7 bankruptcy want to keep their home, so they just keep paying the mortgage payment, and the taxes and insurance.

What About That Home Equity Loan?

I have a goofy case now, where my clients filed Chapter 7 and kept paying on the first mortgage, but not the second.

So, their personal liability was discharged, but the home equity/second mortgage lien remained.

Now, years later, the second mortgage is foreclosing.

So, we filed a Chapter 13 bankruptcy to stop the foreclosure.

Being that the home is worth much less than the balance on the first mortgage, in Chapter 13 we can strip that second mortgage lien.  All we  have to do is prove that, the home is worth less than the balance on the first mortgage.

However, my clients have to complete the Chapter 13 plan successfully to be able to record the lien strip judgment and have the second mortgage lien removed.

Of course, they could have walked away from the house after their Chapter 7 bankruptcy and not had to pay anything on either mortgage.

That is an analysis each homeowner filing bankruptcy should make, as my friend Cathy Moran blogs.  That is, how much is my house worth?  What does it cost me to stay here versus renting?  Not only the mortgage payments, but taxes and insurance.

The conventional wisdom was that home values always went up, so you could not lose “investing” in a home.

Well, that blew up with the real estate bubble explosion in 2008.

It could happen again, and, lots of folks are still in underwater homes, places worth less than what is owed on the mortgages.

I tell people, you have not paid that balance you owe yet, that $200,000 you owe on your home now worth $150,000.  Why not take that $200,000 and buy a $200,000 house?  Filing bankruptcy is your chance to start over and walk away from that bad deal.

But we humans make decisions on the basis of our emotions, and we are tied to our homes, where our kids go to school, neighbors, and so on.

But at least do the numbers, make the analysis, so you know what the consequences of your decision are.

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