One of the primary legal problems that motivates consumers to seek bankruptcy protection is residential mortgage foreclosure. Recent years have seen an explosion of residential mortgage foreclosure filings, and Florida has been one of the hardest hit regions by the nation’s foreclosure crisis.
A Chapter 13 bankruptcy remains one of the most potent and effective methods of dealing with mortgage foreclosure problems for consumers. Filing a bankruptcy action, up to the date of the judicial sale of the property, immediately stops a foreclosure proceeding by removing jurisdiction from the State Court and placing jurisdiction in the U.S. Bankruptcy Court. This removal brings the foreclosure into a Court where the homeowner’s entire financial circumstances can be considered. Homeowners who find themselves unable to juggle credit card debt, car payments, home-equity payments, and medical debt along with their regular mortgage payments can often prevent the loss of their home to foreclosure through restructuring of their debt. In order to save a home by utilizing the bankruptcy code, a homeowner must be able to show that he or she has the ability make the mortgage payments going forward, while catching up on the mortgage payment arrearage over a 5-year period while also providing for fair payment to their remaining creditors.
Many people find themselves filing for bankruptcy protection when their attempts to obtain a mortgage modification have been unsuccessful. It is important to understand that filing for bankruptcy does not remove any ability from a consumer debtor to negotiate a mortgage modification. Consumers who file bankruptcy retain the ability to request that a covered lender review their mortgage for modification under the HAMP program. Sadly, despite the great need for mortgage modifications, and the publicity given modification programs, mortgage modifications remain elusive for a majority of distressed homeowners. It has been my observation that a majority people seeking modification spend months sending and resending paperwork to the mortgage servicer while their mortgage payments get further and further behind only ultimately be denied any meaningful form of modification. Ironically, many people find themselves facing foreclosure after being told to stop making payments on their mortgage in order to qualify for a modification.
A homeowner facing foreclosure should consider the merits of a Chapter 13 bankruptcy as early in the process as possible. The longer a foreclosure case is pending, and payments are not being made on the mortgage debt, the larger the mortgage arrearage becomes. This arrearage can include, not only the missed payments, but also late fees, interest, attorney fees, court costs, and other costs and fees associated with the foreclosure. If this amount becomes sufficiently large it may become impossible, given the homeowner’s income, to bring the mortgage current within the 5-year period allowed in a Chapter 13 bankruptcy.
A Chapter 13 bankruptcy may also allow a homeowner to restructure the debt on their home to remove a second mortgage and discharge the associated debt. This can be very beneficial where the debt owed on a home greatly exceeds the value of the property. In order for this to occur the second (or third mortgage) must be “unsecured”. This means that the value of the home must be less than is owed by the first mortgage. The second mortgage is then considered “unsecured” because if there were a foreclosure there would be no value in the home to pay the debt secured by the second mortgage. We call this process “stripping” the second mortgage. This type of relief is available only limited circumstances, but when it is available it can create immense positive change for the homeowners.
Any homeowner faced with a foreclosure should consult with an experienced bankruptcy attorney to examine how bankruptcy may be able to assist them in saving their home. The vast majority of bankruptcy attorneys offer free initial consultations and the costs and fees for filing a bankruptcy action are often much lower than those commonly associated with foreclosure defense.