Since the housing market crashed in 2007, property prices have continued to drop steadily from their highs. People who bought their real estate in 2000 or earlier should be fine. Of course, this is so, as long as they do not refinance or withdraw shares of your property. If these people don’t have a really good job, they will be in a stream without paddling. Some of these people took out subprime loans and absorbed all of their home equity to buy a boat or a luxury car.
Now that the prices have dropped so much that they are upside down on your mortgage and the loan amount is much higher than what the property could sell for. Now that many of these loans are due, there are many people who are starting to freak out and wondering what happens if they don’t or can’t pay their mortgage. Depending on the financial situation of the person, an alternative could be to file for bankruptcy. With bankruptcy, there are a few options that can help people in different situations. Chapter 7 bankruptcy is good for a person who has a large amount of unsecured debt, such as credit cards, medical bills, and payday loans. Whereas, Chapter 13 bankruptcy is a powerful tool that will stop a foreclosure and allow the debtor to renegotiate their debts with creditors.
When looking at all the options that a person can use for their mortgage, if a person can afford to continue paying and is current, there is no way to use bankruptcy as a way out. There is a default strategic option that simply means to stop paying for your house. The downside to this is that there is no way to predict what the bank will do once you stop paying. One option for them is to file a foreclosure on the property.
Another option if you want to get out of the property is a short sale. In a short sale, the lender must agree to the terms. After a few short sales, many lenders will sue the debtor for the deficiency or simply file Form 1099C with the IRS, making the debtor liable for the proceeds. It is always best to consult a bankruptcy attorney before making a decision like this, as it could affect the debtor’s bankruptcy benefits.
Today, if a person can afford to pay their house, don’t hold your breath waiting for the bank to foreclose. The reason they are not foreclosing on properties right now is that they are already stuck with thousands of houses that they cannot sell right now. This has not been sufficient motivation for banks to offer loan modifications to homeowners in reverse. Chapter 7 bankruptcy can stop a foreclosure, but in most cases it will only be temporary. If someone wants to modify their mortgage, they should consider filing for Chapter 13 bankruptcy. Filing Chapter 13 will definitely get the attention of the mortgage company. In many cases, if the debtor is upside down on your property with a second deed of trust added, the court will allow the debtor to eliminate the second and leave that debt unsecured. Often times, this in itself could help the debtor pay the mortgage payment. Otherwise, the bankruptcy attorney can negotiate with the creditors what is affordable for the debtor in order to keep his property.
