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Filing for Chapter 7 while being behind on mortgage payments


BlackMetallic
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Hi,

 

I am currently working with a BK attorney, doing all the paperwork, etc, and he's planning to file my Chapter 7 bankruptcy in mid-August, so to avoid a CC debt trial in Sept, and a CC judicial arbitration in October. There is a third CC case around the corner, too.

 

The home prices are going up, and I am just $1,000 underwater right now, with the 1st mortgage being worth some 58% of the house value and the 2nd mortgage being worth around 43% of the house value. I am 1 payment behind on the 1st and 2 payments behind on the 2nd. Next month, I will make a single payment on both mortgages, so I will file for BK with the same situation (1 pmt. behind on the 1st, and 2 behind on the 2nd). The 1st mortgage is a 15 year loan, and I only have 5 yrs left, so I am paying almost no interest, but the monthly payment is huge. I can kind of barely do it, but keep being perpetually 1 month behind. The payment for the 2nd is much smaller.

 

Now, once I file for BK and the automatic stay takes place, will the mortgage lenders allow me to catch up on payments while the BK is still in process, or will they refuse to take any payments (since I am behind), wait out the automatic stay, and then immediately start foreclosing and accelerating both loans as soon as I get a BK discharge? I suppose I could be putting the money aside during the automatic stay and cure the default when I am out of BK, but have heard that many banks will put all these "add-on" charges that may make curing the defaults unreachable for me.

 

Finally, shoud I try to negotiate a payment plan for the delinquent mortgage payments (1st and the 2nd) before I file BK?

Would that help any? Should I refrain from mentioning my intention to file BK to any lenders while I am working with them on the payment plans or is it better that they know?

 

I guess I am trying to see what I can do to save the house. I am so close to paying off that darn 1st mortgage, although both 1st and 2nd mortgage take a bit more than 60% of my income, so month-to-month living has been pretty brutal for the last several years.

 

Finally, in BK, if I reafirm the 1st mtg but not the 2nd, am I putting myself under too much risk for foreclosure? The second mtg is a nasty simple interest loan, and I barely made a dent in terms of paying it off within the last several years. On the other hand, the 1st mortgage loan balance is going down fast and will be paid off in 5 yrs, if I can make it.

 

Any ideas are very appreciated. My head's spinning from thinking what to do...

 

 

 

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What does your attorney say?

 

I didn't have a mortgage as part of my BK7 but have seen many references to the idea that if your mortgage is in arrears the only way to save the home is BK13, where you catch up the arrearage in your plan.  If you can get the mortgages current before filing, then you can either reaffirm, or do a "stay and pay" (whether you can stay and pay depends on state and BK court - ask your attorney).

 

I agree with @bingo, you need to think very hard about struggling to keep a home in which you have no equity, and you pay 60% of your income to keep.

 

If you think you're near breakeven on loans vs. value, you are actually at greater risk of the second foreclosing if you default.  That is because there would be an equity cushion to allow them to foreclose, pay off the first mortgage, and recover their loan.  But remember, what the lender realizes in foreclosure is not what the house could sell for due to costs of foreclosing, etc.  But the value you could sell it for is not what you keep either, transaction costs to sell real estate are very high.

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Honestly, if over 60% of your income is going to housing you got something you can't afford.

Were I you, I'd let it go.

 

And I've really, really thought about this option. It totally makese sense. The only thing that is making me have second thoughts about it is that the 1st loan will have been paid off in 5 years (it is a 15 yr loan), and once it does, then I only have a 2nd left with a $600/month payment that would be very affordable by itself, so I could easily pay extra principal every month. If I had 20 more years on the 1st mortgage, I'd totally walk away from the house, but since it's only 5 more, it feels hard to give up being so close to the finish line.

 

 

What does your attorney say?

 

He just said that the situation is kind of "dicey" due to recently rising home prices, and banks thinking they can make more money in the long run by foreclosing and then selling property then by working with the debtor (assuming that the house prices keep rising).

 

 

If you think you're near breakeven on loans vs. value, you are actually at greater risk of the second foreclosing if you default.  That is because there would be an equity cushion to allow them to foreclose, pay off the first mortgage, and recover their loan.  But remember, what the lender realizes in foreclosure is not what the house could sell for due to costs of foreclosing, etc.  But the value you could sell it for is not what you keep either, transaction costs to sell real estate are very high.

 

I think you're so right on the 2nd mortgage itching to foreclose. I actually got a letter today from them, saying they will accelerate the loan if I don't cure my default by mid-August. The automatic stay will protect me from the immediate foreclosure, but I am curious if they'll be even wanting to accept my payments while I am in the midst of the Ch7 proceedings. If they're that aggressive, maybe they'll just wait my Ch7 filing out, refusing any payments, and hit me fully accelerated loan and foreclosure right after the bankruptcy discharge.

 

I've been thinking of filing for Ch13, but have read that it costs several times more in Attorney fees, and that most Ch13's fail, so the debtors end up having to convert to Ch7. Are there any Ch13 success stories out here of people who have made it through the 3-5 years of payments to the Court?

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Not sure a 13 will help you. Yes, it'd allow you to catch up at 100% but, you still have to make those secured payments at 100%. Any way you slice it, 60% of your income is just too much for housing. 5 years isn't just around the corner when you realize you're still paying on the 2nd.

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@BlackMetallic

 

I'm sorry I don't know how to pull in the pieces of your post number 5 but I'm trying to reply to it, and the thread.

 

I think you need to ask your attorney very specifically - "If I don't reaffirm can either of the mortgage lenders foreclose as long as the note is current?".  What you need to know is as a matter of law in your jurisdiction can they foreclose while you are keeping the payments current, not what the likelihood is of them foreclosing if they are legally permitted to.  The way you report your attorney's advice makes me think the mortgage lenders can in fact foreclose if you file BK7 and don't reaffirm.

 

From what I've read of BK law you must be current on the mortgages (both of them) to be sure to keep the home.  Let's say you are current on the first and not the second, the second lien holder can even ask to lift the stay and begin foreclosure, or can begin foreclosure as soon as you are discharged.  You are in serious jeopardy with the second mortgage holder because they could pay off the first mortgage (58%) and keep a good chunk of the 42% after expenses.  That is better than many of their second liens I'll bet...

 

I think you are mistaken to focus on "five more years" of the first mortgage.  You are about to lose the home because you took a short mortgage term.  If you had taken a 30 year you might be better able to meet the payments.  You may have trouble convincing a judge to even allow you to reaffirm for that reason.

 

The best answer might be to do something with a BK13, although I know less about them.  Speculating here but in a BK13 your plan will usually make full payments to the secured creditors (the mortgages) with whatever is left going as a partial repayment of the unsecureds.  The costs will be higher and you will be under trustee supervision for three to five years.  But you would finish a five year plan with your unsecured debt discharged, your first mortgage paid off and the second under control.

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