Can Bankruptcy Save My Home?

As your San Diego Bankruptcy attorney I can explain how filing for bankruptcy might make it easier to hold on to your home.

* Allow me to provide a free evaluation to see if Chapter 7 will help you save your home.
* Let’s see if Chapter 13 will help you save your home.
* Talk to me about what other steps you should take to save your home
* Let’s discuss the idea of filing Chapter 7 to rid yourself of all the other debt that is making it difficult to make your mortgage payments
* Let’s talk about the possibility of getting rid of your 2nd mortgage or credit line by filing Chapter 13
* Are you concerned that you will be held personally liable if the bank forecloses? Let me explain your rights.
Call me now at 760 634 6788 or send me an e-mail

If you are having problems paying your mortgage you need to first try to negotiate with your lender. You can do it yourself. Or you can enlist the assistance of a nonprofit organization to help you such as the Housing

Opportunities Collaborative. You might also try Springboard. I recommend that you do not pay a high fee to a loan modification service. Be wary of a loan modification company that wants to charge you a large fee or of attorneys that work in association with loan modification companies.

Many people are finding it difficult or impossible to get the lender to significantly modify the loan. The reason is that the financial institution you are talking to probably doesn’t even own the loan. Many loans have been securitized. Securitization of loans, which was supposed to be a great innovation in lending, separated the entity servicing the loan ‑‑ usually, a bank that collects payments, chases delinquents and files foreclosures ‑‑ from the loan’s owners, who are far‑flung and faceless investors.

Servicers worry that if they modify a mortgage to keep payments flowing rather than foreclose, they’ll be sued by bondholders even if the result is arguably better in the long run. So the banks are afraid to modify your mortgage by lowering the interest rate or by giving you other favorable terms.

For this reason, many property owners are turning to bankruptcy lawyers and the bankruptcy court for help. Here are the ways bankruptcy can help the homeowner who is having difficulty with his or her mortgage:

1. The threat of filing for bankruptcy may put you in a better bargaining position. If the bank forecloses the bank will probably receive less at the foreclosure sale than you owe the bank. This difference (the difference between what you owe and the amount the bank receives at the foreclosure sale) is called a deficiency. (This is discussed in much greater detail elewhere in this site.) Depending on the type of loan you have and the method the bank uses to foreclose the bank may be able to sue you for this deficiency.

If you discharge your debts in a Chapter 7 bankruptcy then the bank can not sue you for the deficiency. Since the bank might lose this right to sue you if you file for bankruptcy, having a bankruptcy attorney on your team and making a credible threat of bankruptcy might put you in a better negotiating position and might help you keep your property.

2. Chapter 13: A Chapter 13 may help you keep your property.

In a Chapter 13 you and your attorney prepare a plan which lists your income and expenses. In the plan, your debts are divided into secured and unsecured debts. Generally speaking the plan must provide that you are paying your secured debts in full (more on this below). But your unsecured debts are paid at a discount, often for pennies on the dollar, usually over a 5 year period. At the end of the 5 year period the unpaid unsecured debt is discharged.

A way a Chapter 13 can help is if you have fallen behind but you just need time to catch up. In a Chapter 13 the court allows you to pay the past due amounts over time along with you regular monthly payment. In a Chapter 13 you have to pay all your secured debts in full but you only pay your unsecured debts to the extent your income permits it. (Often for pennies on the dollar)

Your mortgages are secured debts, at least when you originally take them out (borrow the money). You would think that because your mortgages are secured debts you would have to pay them in full in a Chapter 13. But if the value of your property dips below the amount of the loan balance on your mortgage then part of the loan balance becomes unsecured.
Let's say your property is worth $300,000. But you owe $400,000. The most the bank could hope to receive by a foreclosure of its security interest would be $300,000. That’s all the property is worth. So that’s the most that a buyer would pay at the foreclosure sale. The bank might be able to sue you personally for the $100,000 but the bank won’t get it by merely foreclosing. Therefore it is said that the secured portion of the loan is $300,000.

In a Chapter 13 the court divides up that $400,000 into the secured portion and the unsecured portion. The secured portion ($300,000) must be paid in full under the Chapter 13 plan. But the unsecured portion ($100,000) gets paid off like the rest of your unsecured debts. (over time and only to the extent you can afford it, often for pennies on the dollar) This is called lien stripping.

You can only lien strip in a Chapter 13 (not in a Chapter 7)

So let’s return to the original question: CAN BANKRUPTCY HELP ME SAVE MY HOME OR OTHER PROPERTY? The answer may be yes if you mortgage exceeds the value of your property since the principal on your mortgage can be reduced by lien stripping.

Principal residence exception: But here is some bad news. Even in a Chapter 13, you can not lien strip if the property securing the debt is your personal residence.

You can lien strip on your vacation home, yacht, airplane but not your home. This is the Principal residence exception to lien stripping.

So, in other words, if the property in question is not your personal residence (eg a rental property) and the mortgage exceeds the value of the property then a Chapter 13 may very well help you by allowing lien stripping.

Exception to the personal residence exception: Now here’s some good news. You can lien strip even on your personal residence is if the mortgage (usually a 2nd mortgage) is wholly unsecured. You can lien strip that. The case that allows you to do this in our circuit (the 9th Circuit) is In re Zimmer (9th Cir. 2002) 313 F.3d 1220, 1222
Let me give you an example of a mortgage that is wholly unsecured. Again, assume your home is worth $300,000. Assume the 1st is $400,000. Finally, assume you also have a 2nd for $50,000. The 2nd is wholly unsecured.

Call or e-mail me so we can discuss all these techniques and options.

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