For many people in America, buying their own home is one of the biggest purchases in their lifetime. Their home is also typically the most valuable asset they own. Cars and other items lose value as they get older, but land typically holds its value or actually increases in value. So naturally home mortgages are one of the most common sources of concern and worry when I talk with potential clients.
What to Keep In Mind
Your Mortgage Contract
The first thing to keep in mind about mortgages and bankruptcy is that in many situations the Bankruptcy Court cannot change the underlying terms of your mortgage contract. The amount of your mortgage payments, the interest rate, and the length of the loan term are all set forth in your original mortgage contract and the Court typically cannot change those things.
Additionally, the Court cannot force a mortgage company to go through what are commonly called “loss mitigation” options. When you have fallen behind on your mortgage, many lenders will offer options to help you catch up the amount you’re behind or options for selling the home quickly to get out from under the debt and try to find less expensive housing. One of the most common is a mortgage modification. A typical mortgage modification will add time to the existing length of the loan, essentially letting you defer your missed payments to the end of the mortgage. Many modifications will also lower your monthly payment. You will end up paying more overall because of the extra interest that accrues over time, but a modification can help if you have immediate budget problems and need relief.
Selling Your Home
If you’ve decided that the home is just too expensive and you’re trying to sell the property, then a short sale may be one avenue to help. A short sale is where the mortgage company agrees to let the owner sell the property for less than the amount owed. In many cases the mortgage company will consider the loan satisfied, but not always. Be sure to read the fine print involved in any short sale transaction because you may still owe a debt to the mortgage company even after the sale. Again, the Bankruptcy Court has no authority to force a short sale or to make the mortgage company work with you. This is something you’d need to work out with the mortgage lender yourself.
Overall Mortgage Debt
Lastly, bankruptcy cannot wipe out a mortgage debt unless you agree to let the lender take possession of the property. If you owe on a loan with collateral, the debt must be paid in order to keep the collateral. From time to time I meet with potential clients who believe you can “put a mortgage in bankruptcy” and that the debt is gone and the house is free and clear. But I find that these same people usually believe that bankruptcy ruins your credit for years. In truth, bankruptcy doesn’t do anything as powerful as giving you a free house, but it also isn’t as bad on your credit as many people think. In fact it clears your debt from your credit report and allows your credit score to increase.
A host of amendments to the Bankruptcy Code were introduced in 2005 that made it more difficult to file bankruptcy in the first place and made it especially more difficult to file more than once. The end result has been that creditors are more likely to lend to a person coming out of bankruptcy. This makes rebuilding credit easier than it was back in the ‘90s.
If you’re having trouble keeping up with your mortgage payment and your other bills, then you may want to explore the options you have available through bankruptcy. At Bond & Botes, our experienced attorneys have years of practice handling a variety of bankruptcy cases. We have convenient offices in Alabama, Tennessee, and Mississippi, and we offer free initial consultations. Please contact us to set up an appointment to discuss all the ways bankruptcy can help you.