Home Sweet Home!



Whether you live here, or....



Home is where the heart is...  That's the expression and that's how most of us feel.  The question of what happens to one's home in a bankruptcy is a question that causes a lot of apprehension for our clients.

Most people are surprised to find out that generally they can keep their home through a bankruptcy.  So, how does that work?



...here, it is still home!

Let me give you a couple of examples. 

Example A:  Home is worth $200,000 with a $50,000 mortgage.  If a person who lives in this home files for bankruptcy, they can keep it, so long as they keep their mortgage current.  Why?  Arizona law says that you can protect $150,000 worth of equity in your home.  In other words, neither the bankruptcy court, nor your creditors, can take that home from you.  This is true in a Chapter 7, a Chapter 13, or a Chapter 11. 

Example B:  Home is worth $200,000 with a $210,000 first mortgage and a $50,000 second mortgage.  If a person who lives in this home files for bankruptcy they can still keep it for the same reasons set forth above.  There is no equity to protect, so as long as they keep their mortgage payments current, they will be left alone. 

However, in Example B there is a substantial difference between Chapter 7 and Chapter 13.  In a Chapter 7, the debtor can discharge both loans, but they can't get rid of either lien.  This means they don't have to pay on either loan, but the lenders can choose to foreclose.  Most likely, if the debtor stopped paying on their first mortgage, the lender would foreclose.  However, if the debtor stops paying on their second mortgage, but keep the first current, the second lender likely WON'T foreclose.  Why?  The second mortgage lender gains nothing from the foreclosure sale, because all the proceeds from the sale of the home would go to the first mortgage lender.  So what happens in that case?  The second mortgage can be held in limbo until (i) the debtor and lender settle the account; (ii) the debtor tries to sell the home (in which case the second mortgage lender will require payment); (iii) there is enough equity to refinance the home; or (iv) the home's value increases to the point where it is worth it to the second mortgage lender to foreclose.  Wow, there is a lot going on there.

So, what happens in a Chapter 13?  This is really cool.  Chapter 13 permits the debtor to strip-off the second lien and treat the second mortgage lender as an unsecured creditor.  This means that upon completion of the Chapter 13 repayment plan, the home will only have one loan on the home (the original first mortgage lender).  The second mortgage lender has their lien stripped and they get treated as an unsecured creditor in your repayment plan (which generally means they get a few pennies on the dollar for their loan).

Another tool available in a Chapter 13, which is not available in a Chapter 7, is that arrearages (the amount you are behind on your loans) can be made up through a Chapter 13 repayment plan.  This is very useful if you are trying to avoid or cancel a foreclosure.

Remember, every situation is different.  If you would like to see how these issues affect your personal situation, set up a time and we'd be happy to sit down with you.