Bankruptcy & Avoiding Foreclosure through Loan Modification

Florida has been severely affected by the foreclosure crisis.  In fact, it is one of the states hardest hit by the mortgage crisis in the whole country. Here are some common questions and answers about declaring bankruptcy and saving your home or condominium:

Q: How do I know if bankruptcy is appropriate for me?

A: If you are unable to pay your bills, including your mortgage, you can file for bankruptcy to stop creditors from harassing you regarding your debts and give you a fresh financial start.  Individuals can file Chapter 7 or Chapter 13 bankruptcy.  With Chapter 7 bankruptcy, your unsecured debts are discharged, meaning you do not have to pay them.  You can reaffirm secured debt if it falls below certain equity limitations.  Additionally, you surrender property exceeding certain limits or exemptions so that it can be sold to pay creditors. 

In a Chapter 13 bankruptcy, you must file a payment plan with the court that outlines how you will pay your debts over the next three to five years using your existing income.  Chapter 13 bankruptcy may be useful for people who have short-term financial difficulties, but are still able to make regular payments.  Ultimately, you should discuss your financial situation with an experienced bankruptcy attorney who can analyze your financial situation and advise you on your best course of action.

Q: If I file bankruptcy, can I avoid foreclosure?

A: Filing for bankruptcy does not eliminate the liens and mortgages on one's home; it only temporarily stops the process.  Whether you can keep your house depends on the equity a person has in the home.  Equity is the current value of the property less costs of the sale, less payoff balances on liens and mortgages.  Typically, if there is no equity in the home, then the owner can keep the home in a Chapter 7 bankruptcy, as long as the homeowner pays the mortgage.  However, if the equity exceeds the allowed exemption, which is defined as the amount of property creditors cannot go after to satisfy debts, the homeowner may lose the home.  Florida has a very broad homestead exemption. Article X, Section 4 of the Florida Constitution provides that property located within a city up to one-half an acre can be protected for an unlimited amount, subject to federal and county limits.

Q: Are there alternatives to filing bankruptcy that would allow me to keep my house?

A: Yes. You have several options for loan modification that have less of a negative impact on your credit history and will allow you to keep your house.

• Reinstatement allows you to pay the total amount that is past due, including late fees, in a lump sum by a certain date.  Some homeowners have funds at their disposal through retirement funds, insurance policies, or private loans from friends or family members that may become available later.
• Loan Forbearance lets you delay or reduce payments for a brief period of time.  This can be combined with a reinstatement plan if you know that you will be able to make a lump sum payment by a specified date.
• Repayment Plan gives you the option of prepaying part of the delinquency every month in addition to the regular monthly installment.

If you are unable to pay your mortgage for a long period, you have other options:

• Mortgage modification is a permanent or temporary change to the terms of the loan.  Modifications involve rate reduction, setting a fixed or adjustable rate for a specified period of time, increasing the loan balance with missed payments, or extending length of the mortgage.
• Partial claim is an option available for insured mortgages, for example, those insured by the Federal Housing Administration.  With this option, a lender can receive a one-time interest-free loan from the loan's mortgage guarantor to make the mortgage payments current.  This option would allow you to not repay the loan for a certain number of years.

If you are considering filing for bankruptcy, or would like more information on loan modification options, especially in light of the government's recent plans to help homeowners who are at risk of foreclosure, consult an experienced attorney familiar in this area of law.  The attorneys at Padula & Grant are experienced in all aspects of bankruptcy and loan modification and can help you with your situation.  If you would like to talk to us about your situation, contact us by phone or email for a free initial consultation.