What should you do if you’re underwater on your mortgage and you are considering a Chapter 7 or Chapter 13 bankruptcy?  The term “underwater home” refers to houses that have lost so much market value that they are now worth less than the outstanding balance on the home mortgages.  In many cases, a bankruptcy may be able to bring some relief to the owner of the underwater property so they can begin a financial fresh start.

• If a Chapter 7 debt discharge bankruptcy is being planned, the automatic stay will hold off any foreclosure until the Lender obtains Relief from the Automatic Stay or possibly until the discharge of the Chapter 7 case, typically 2-5 months. This could possibly buy the homeowner enough time to catch up with their payments and save the home from foreclosure.
• If the homeowner is significantly behind on the home mortgage, a Chapter 7 will buy the debtor a few months to find a new place to live.  A Chapter 7 bankruptcy will also be of help if the debtor is burdened with significant amounts of credit card debt and other unsecured loans, and it erases the burden of continuing to owe money to the lenders after the home has been foreclosed.
  • Using a Chapter 7 case to relieve the obligation to repay unsecured bills may free up enough monthly income to help keep the house.
  • The homestead exemption (which protects a certain amount of equity) that is available in the debtor’s home state may be large enough to prevent the house from being surrendered to the bankruptcy trustee. (you must also continue to make the mortgage payments on your home if you want to keep your home).
• If the debtor has sufficient income to make payments toward all secured debts, then a Chapter 13 debt reorganization bankruptcy may be a better option.
  • The automatic stay of the bankruptcy holds off any foreclosure during the repayment plan period, and no interest accrues on the debt until the Chapter 13 plan is over and discharged.
  • Working with an experienced bankruptcy attorney, the debtor might be able to strip off any second and;
  • or third liens from the home if the first mortgage has used up all the available equity on the underwater property.

In either case, preventing a foreclosure or getting out from under an underwater mortgage may be better than simply losing the home with no proceeds to show for it. The discharge of the bankruptcy also eliminates the risk of owing the lender for any deficiency between the price the home brings upon sale and the value of the mortgage loan.

Financial Freedom Law is an experienced, compassionate partner that can help you decide among many options, depending on income, assets, the nature of your debts, and the goals you may have after completion of a Chapter 7 or Chapter 13 bankruptcy.  Please contact our Sacramento office at 916-313-9069 or via email at info@california-bankruptcyattorney.com