The MLG Blog

Can I (or should I) keep my home through bankruptcy?

January 21, 2010

Generally speaking if a client of mine is having a hard time making their mortgage payments, and they do not foresee any increase in their income I usually advise them to seriously consider giving up the home.

But first a primer on the different foreclosure processes available to mortgage companies:
1. Foreclosure by advertisement: The foreclosure is advertised in the paper and you are not sued in court. After the foreclosure you don’t owe the first mortgage company for any shortfall in the sale of your home. However, if there is a second mortgage they can sue you for what they are still owed. The vast majority of mortgage foreclosures on homes are by advertisement.
2. Foreclosure by action: The mortgage company sues you for breaching your mortgage contract and they will seek a judgment against you for any shortfall in the sale of your home. They will then attempt to garnish wages and levy bank accounts until the judgment is either satisfied or discharged in bankruptcy

The reasons for this advice can be explained by imagining the most likely outcomes of keeping your home through a chapter 7 bankruptcy:
• You continue to struggle making the mortgage payments but stay current and run in to no problems. If your income stays as it is or increases, and your living expenses do not increase this could work, but it is almost impossible to predict if this will be the case.
Best case scenario is your income increases and you can afford the monthly payments or you continue to scrape buy making the possibility of falling in to debt again that much more likely.

• You make payments for a while but then fall behind. Eventually the mortgage company will foreclose and you will loose your house. If you have a second mortgage the consequences of a foreclosure get even worse (see above).
Because the home was kept through the bankruptcy you will be unable to file chapter 7 again for 8 years. You can always file a chapter 13 bankruptcy, but to be able to do that your monthly income must exceed your monthly living expenses. That disposable income will be put in to a payment plan for either 3 or 5 years.
If there is only one mortgage on the home generally there is no judgment for any shortfall in a sale and no income tax consequences
If there is a second mortgage, they will likely sue you for the shortfall and get a judgment against you. They will then begin garnishing wages and levying bank accounts.

Those two scenarios are not ideal. If a client is filing bankruptcy, it is the best time to walk away from the home. The foreclosure process will either begin or continue and most people can live in their homes for 8 months to 1 year mortgage free while they save up money for an apartment or rental home.
In summary, the risks usually far outweigh the benefits of keeping a home through bankruptcy if you are struggling to make the payments.

Each case is unique, and this general overview of keeping homes through a bankruptcy does not cover all of the possibilities. If you would like to speak with an experienced bankrutcy attorney based in Minneapolis MN, please do not hesitate to contact me.


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