Foreclosure and Bankruptcy: Can and should you keep your home?

Foreclosure and Bankruptcy: Can you keep your home?

Lars Peterson - Attorney at LawLaw Office of Lars Peterson, LLLC1188 Bishop Street, Suite 3107Honolulu, HI 96813P: (808) 469-4300 F: (808) 237-5849lars@petersonlawhawaii.com

Is this you?

Does your household have less income than it used to?

Job loss or furlough

Unexpected medical bills

Creditors require higher payments than before (e.g., credit card terms)

Are you behind on paying your bills?

Are your credit card debts increasing?

Has the value of your home decreased?

Property values of homes in Hawai`i have decreased substantially that often leads to loss of equity and, in fact, many people now owe more than the home is worth

Have you received a foreclosure notice? Or is you lender calling you?

In other words: Has your financial situation worsened or will it in the foreseeable future?If yes, ...

DO SOMETHING - NOW

Taking no action will have consequences

It is important to take that first step and talk to somebody:

Your bank or lender

Your realtor

Your mortgage broker

Your attorney

Talk to a Bankruptcy Attorney

Ask for free advice & consultations

A good bankruptcy attorney will offer a free consultation. Why? Because we need to find out if bankruptcy is right for you!

There are non-bankruptcy alternatives (debt settlement or negotiation) with which a bankruptcy attorney can help

You need to know your options and evaluate your situation carefully

Many services are free or cheaper than you think!

Why deal with it when the financial problems start or are foreseeable?

Each case is different and many solutions will take time

Hiring an attorney when the financial problems are foreseeable or have just begun is usually much cheaper than waiting until the foreclosure is taking place

You can prevent the foreclosure by filing bankruptcy

Be realistic about your situation and your options

Budget: Income and expenses

A third party can be objective about an issue which can be very emotional and confusing

How does Bankruptcy affect Foreclosure

Chapter 13 and 11 can help you prevent foreclosure (you will keep your home)

Chapter 7 usually does not allow you to keep your home (you give up your home); but it can help you prevent negative consequences after foreclosure (deficiency judgments, taxes)

Foreclosure & Timing of Bankruptcy

To save your home or avoid negative consequences:

You should file bankruptcy before the auction takes place

You can file bankruptcy until a court confirms the foreclosure (after the auction)

Why Bankruptcy

Bankruptcy might save your home

Sometimes, even if you get a loan modification, you still might have to consider bankruptcy

It can avoid other negative consequences (taxes, deficiency judgments)

Bankruptcy Options

3 Chapters: Which one is right for you?

Chapter 13

Chapter 11

Chapter 7

Chapter 13

Reorganization of Individual (or couple) with regular income

Chapter 13 is right for you if:

If you are behind on your mortgage payment (called in arrears or arrearage);

If your decreased household income is only temporary; and

You can catch up on the arrears during a 3-5 year period

Advantages of Chapter 13

It can provide you with the time you need to catch up on the arrearage.

Usually, Chapter 13 debtors have significant other debts, too (e.g., credit cards, medical bills, etc.) you will only have to pay back a fraction of these unsecured debts in Chapter 13.

Unsecured vs. secured debts: unsecured means there is no collateral/security besides your personal obligation to pay back the debt; secured means that besides your personal obligation, the lender can take back the collateral (home, car, furniture) and sell it to satisfy the debt.

Lower payments on other (unsecured) debts makes the most important debt (your mortgage) easier to pay

Payments in Chapter 13

If you file Chapter 13, you are in bankruptcy for 3-5 years.

You pay your mortgage lender directly (regular monthly mortgage payment)

You make 1 monthly payment to the Chapter 13 bankruptcy trustee for all your other debts

The mortgage arrearage is paid through your bankruptcy

Example: you are 6 months behind on your monthly mortgage payment of $2,000 arrears: $12,000.

3-year plan: $330/month (for mortgage only)

5-year plan: $200/month (for mortgage only)

Chapter 11

Reorganization of Individual (or couple) on a larger scale

Usually, large businesses file Chapter 11

When do you have to consider Chapter 11?

If you owe $1,010,650 on your promissory note (mortgage) for the house, you do NOT qualify for Chapter 13

Chapter 11 is time consuming & costly, but sometimes the only option to save a home.

Chapter 7

Liquidation get rid of all unprotected assets AND your debts

When to consider Chapter 7:

If you have realized that you cannot save your home and you have to give it upyou could not pay your mortgage and make the monthly payments to the Chapter 13 bankruptcy trustee for the other debts

Why to file Chapter 7

Ok, I am losing my home why should I consider Chapter 7?

When you receive a discharge in bankruptcy, you are no longer personally liable for your debts

What does that mean? For unsecured debt (e.g., credit cards, medical bills) - you no longer owe the money

For secured debt (e.g., your home, cars) - the lender can only take back the security or collateral and sell it

If there is a deficiency (the house sells at foreclosure for less than the amount you currently owe), the lender will very likely - get a deficiency judgment against you (local lenders usually do!)

Chapter 7 & Deficiency Judgments

If you do not file a Chapter 7 bankruptcy, you will still owe money to the lender

Example: You owe $450,000 on promissory note; house sells at foreclosure for 350,000. You have lost your home AND you are now personally liable for the $100,000 (plus costs of foreclosure).

A judgment can be valid in Hawaii for 20 years. So, if you ever own anything of value again, the lender can pursue you for up to 20 years.

Interest accrues on judgments

Chapter 7 & Taxes

Without Chapter 7, you may face substantial tax consequences

If the lender cannot collect the money you owe after foreclosure (deficiency), the lender will likely file form 1099-C with the IRS and deficiency amount will be added to your income significantly higher income taxes

With Chapter 7 - and if the home you gave up was your personal residence you will not owe income taxes.

Example continued: you owe $100,000 after foreclosure; if lender writes off debt and files 1099-C, your annual income increases by $100,000;

If you file Chapter 7, there will be no increased income

In sum: Chapter 7 avoids deficiency claims & income taxes

Deed in Lieu of Foreclosure

Possible alternative to Chapter 7

What is it?You return the property to the lender

Requirements:Only one mortgage (1st mortgage)

Considerations:Usually you have more time to move out

Not useful if you have significant equity in property

Not useful if you have significant other debts

Lender must waive any deficiency claim

Take charge before it is too late!

Talk to professionals & get a clear picture of your situation

Call me for a free consultation I will tell you if you should consider bankruptcy

Although nobody likes to discuss financial problems, it is important to take charge while you still can

Everything you tell your attorney is confidential (attorney-client privilege)