No matter how thorough we think we are when it comes to discussing bankruptcy and your mortgage, there are bound to be more questions. But we’re talking about your home here. It may be where you grew up. It may be where you raised your own kids. It may the falling down heap you purchased in your late twenties and lovingly restored piece by piece and finally moved completed on your 35th birthday. Regardless of how you feel about your home, it’s best to get all your questions asked and answered before you ever file for bankruptcy.
The most common first question is, “Should I keep the home or walk away?”
Your lender may be willing to approve a loan modification. For their own unfathomable reasons, they are approving more than ever before, so your chances are fair to good. If you do decide to walk away from the house, the lender cannot pursue you for the balance due. If you stop making your mortgage payments (or if you haven’t been making them for a while), the lender can foreclose, but not until the bankruptcy case is complete. It is important to note that the bankruptcy itself does not serve as a default as long as the homeowner is current on their payments.
“What are your options regarding your home as the “homeowner” during bankruptcy?”
You are still the homeowner and retain the rights pursuant to that status. You can still write off the interest and property taxes. You can still access equity in the property. You can still sell the house or transfer the house to family, friends, etc. You can still work on a loan modification with your lender. A successful loan modification will not reestablish liability on the loan. The terms of the loan might change, but it’s not a refinance. If you were to refinance the property with a new loan – you would be reestablishing liability. This is not the case with a loan modification.
“If my lender is willing to work on a loan modification should I reaffirm the loan?”
Some lenders are offering to work on a loan modification with homeowners in the midst of bankruptcy only if they are willing to sign a reaffirmation agreement. The reaffirmation agreement is a legally binding and enforceable contract that is filed with the bankruptcy court. It states that you promise to repay all or a portion of a debt that could otherwise be included in the discharge of your bankruptcy case. Deciding to take this route is risky. To do so means that you are reestablishing a substantial debt that would otherwise be eliminated. In some states, the lender can even pursue the homeowner post-foreclosure for a deficient balance; in this case reaffirming the loan is not just a questionable choice. It’s a horrible idea. Make sure you know the bankruptcy laws specific to your state.
The key is making the decision based on the facts. Know whether or not reaffirming or refinancing the loan will result in liability that would otherwise end up wiped out by your bankruptcy discharge. If you need assistance making an informed decision, contact the southern California bankruptcy attorneys at Westgate Law.