How Chapter 13 Bankruptcy Can Save Your Home

The connotation with bankruptcy is a bad one, and consequently the decision to file for Chapter 7 or 13 should not be taken lightly

. Their is a very specific niche of homeowners that can reap major benefits of a chapter 13 bankruptcy and save their home. Homeowners with 2nd and 3rd mortgages can often have these liens "stripped." This is not to say that any homeowner with a junior lien should file Chapter 13 in effort to save their home. The sad reality is that most homeowners that file for bankruptcy, end up losing their home to foreclosure regardless.

Homeowners in the past 10 years that took out a junior lien (2nd Mortgage or equity line) on their property before the market collapse, are usually the perfect candidates for a Chapter 13 BK. These are the homeowners that are most likely "upside-down" on their house, meaning they owe more on the house then the value.

Lets Paint the Perfect Candidate

Take a house that is worth 300K in today's market, and the homeowner owes 350K to their first lien, and 80K to the second lien. This means that this borrower owes 430K to 2 lenders on a house that is worth 300K in today's market (This is not uncommon at all. Many borrowers borrowed against their home with the mistaken belief or misguided advice that the market would continue to go up). So this borrower has negative equity of $130K.

The second lien holder has no collateral in this situation. They can't foreclose on the homeowner because they simply don't have any money to recoup. Houses at auction usually go for about 80% (in this case about 240K) of the market value, and the first lien holder gets all of the money until everything is paid in full, if any money is left over, then subsequent liens will be paid. If the price sold at auction does not pay the first lien off, then the property will be retained as an REO (that's another article).

Now, the benefits of a Chap 13.

In this situation, the borrower will most likely be able to get the second lien removed completely and only be liable for the first. Any other unsecured debts that the borrower may have, will be restructured at a lower payment. So the borrower has managed to remove a second lien and any credit cards, medical bills or other unsecured debts from their monthly expenses.

And the drawbacks.

Bankruptcies and Foreclosures will stay on your credit report for 10 years. A homeowner faced with the prospect of either would be better served to file BK and save their home as opposed to losing their house to foreclosure. Both do a tremendous amount of damage to credit.

A Chapter 13 is never a good thing. But given the choice between Chapter 13 BK or Foreclosure, most people would choose bankruptcy. 2nd liens are often high interest rate, high payment loans, that when removed, give homeowners the cushion they need to meet their monthly obligations. As noted, this is not a solution for everyone. It would be unwise to file BK, just to be facing foreclosure a month later.

The homeowner has to way the pros and cons. Ask themselves honestly, "will I be able to afford all of my monthly obligations, if my expenses drop by x amount of dollars." Anyone who thinks they are a good candidate should talk to a lawyer, it couldn't hurt.

by: Mark Korte

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