What should you do if you’re underwater on your mortgage and you are considering a Chapter 7 or Chapter 13 bankruptcy? The term “underwater home” refers to houses that have lost so much market value that they are now worth less than the outstanding balance on the home mortgages. In many cases, a bankruptcy may be able to bring some relief to the owner of the underwater property so they can begin a financial fresh start.
- If a Chapter 7 debt discharge bankruptcy is being planned, the automatic stay will hold off any foreclosure until the Lender obtains Relief from the Automatic Stay or possibly until the discharge of the Chapter 7 case, typically 2-5 months. This could possibly buy the homeowner enough time to catch up with their payments and save the home from foreclosure.
- If the homeowner is significantly behind on the home mortgage, a Chapter 7 will buy the debtor a few months to find a new place to live. A Chapter 7 bankruptcy will also be of help if the debtor is burdened with significant amounts of credit card debt and other unsecured loans, and it erases the burden of continuing to owe money to the lenders after the home has been foreclosed.
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In the past, our firm, Acclaim Legal Services, mainly filed Chapter 13 bankruptcies to stop foreclosure sales and give borrowers the opportunity to cure outstanding mortgage arrearages. More and more, we are seeing clients choosing to surrender their property under the Chapter 13 plan due to severely declined house values. Chapter 7 may seem like the obvious choice when surrender of property is the goal, however, in many circumstances an individual may not be eligible for Chapter 7 (e.g., too much income, prior Ch. 7 within 8 years) or their overall circumstances may dictate that a Chapter 13 is more appropriate (e.g., non-exempt property exists and client seeks to avoid liquidation; substantial priority debt exists that the debtor needs an opportunity to pay as it would be non-dischargeable in Ch. 7
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Medical debt is becoming a leading reason for seeking Chapter 7 or Chapter 13 bankruptcy. Careful planning and knowing what your options are will keep you safer rather than sorrier.
- According to Atlanta based non-profit CredAbility, about 20% of all newly file bankruptcies this year were related to medical debt as a main cause. This is a rise — up from an average of 13% just two years ago.
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The election of Chapter 13 increases options available when filing bankruptcy. In exchange for at least partial payment on all debts, the added benefits in Chapter 13 frequently make it the best choice. You may include back taxes, past due mortgage payments and a wide variety of priority debts in the plan. The partial payment required may be minimal. In many cases, the percentage payment on unsecured debts is less than 5%. For a minimal payment, you may avoid tax seizures and home foreclosure.
Each person who is experiencing financial difficulty presents a unique set of challenges. Income, goals and necessities vary in each situation. Nevertheless, a solution exists for all financial problems. You may avoid filing bankruptcy if acting early. You may settle unsecured debts easily for less than 50 cents on the dollar without filing. You may need to file at some point in the future to gain the protection of the automatic stay. Keep your options open.
All people must pay income tax in all situations. Read more…