Our last blog was about the challenges and potential dangers of short sales of your home. Today’s is about ways that Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” can be better alternatives in certain situations.
Let’s look at two rationales which would induce you to think about doing a short sale, and the potential bankruptcy alternatives in each.
Can’t Afford Your House Mortgage(s)
If you have less income than when you bought your house, or higher mortgage payments, so that you can no longer stay current, and your house is not worth what you owe on it, then a short sale may be best way to get out of it and the debt you owe on it.
But maybe you are making false assumptions about not being able to afford the house. You may well have some very good reasons to stay in your house—maintaining family stability, the relatively high cost and other detriments of renting, the difficulty of buying another house in the near future, and the recently rising value of your house. So it’s worth looking carefully at all possible ways to hold onto it.
Drastically Lower the Cost of Owning Your Home
Either a Chapter 7 or Chapter 13 filing could reduce or eliminate other debts so that perhaps you could better afford to pay the home obligations. A Chapter 13 case may eliminate a second mortgage lien: if your home is worth less than the balance of your first mortgage, then you can “strip” this second lien off your home. And it could eliminate, reduce, or delay payments on other liens on the home’s title.
A bankruptcy, possibly combined with a mortgage modification, may drastically reduce your monthly mortgage payments. The house that you assumed was not affordable could in fact be your least expensive housing option, and be your best value especially when considering all the intangibles.
Involuntary Liens Making Your Home More of a Burden than a Benefit
Especially if you have been facing financial challenges for a prolonged period, your home’s title may well be burdened by liens that have been attached by various kinds of creditors. If you have been sued by a credit card company, medical provider, or collection agency, you almost certainly have a judgment lien against your home. If you are behind on income taxes, the IRS or Oregon Department of Revenue may well have imposed a tax lien. If you are behind on spousal or child support, or homeowner association dues, those create automatic liens against your real estate. Similar liens may be on your home for certain unpaid utility bills, from disputes with a home repair contractor, and possibly even from violating certain local governmental ordinances.
Indeed you may well be under a lot of pressure to pay one or more of these obligations, giving you extra reason to sell your home with a short sale. The IRS and support enforcement agencies can be especially aggressive. But almost any creditor with a lien on your home can try to foreclose on its lien in an effort to get paid. With all these headaches burdening your home, you understandably feel that selling it to get some money to an aggressive creditor or two is worthwhile, even if they are not paid in full and even though you get no money in your own pocket.
But the first problem is that when you have these kinds of lienholders, not just your first and second mortgage lenders, closing a successful short sale becomes more challenging. And second, even if you can pull it off, there is generally nothing that stops your lienholders from continuing or starting to pursue you right after the sale.
The Bankruptcy Solutions to “Involuntary” Lienholders
These lienholders can often be dealt with very well through the two consumer bankruptcy options.
A Chapter 7 case can often “avoid” judgment liens on your home. Even if you have a judgment against you for tens of thousands of dollars, in the right scenario the underlying debt can be discharged (permanently written off) and the judgment lien removed from your home’s title. That can even happen with income tax liens if the tax is old enough and there is no equity whatsoever for that tax lien. With other liens that cannot be “avoided”—such as ones securing support obligations—writing off your other debts would likely better enable you to focus your future financial energies on paying off those obligations and clearing the lien from your home.
Chapter 13 can be an even more impressive lien-clearing tool. Besides “avoiding” judgment liens as under Chapter 7 (and potentially stripping second/third mortgages as described above), it can defeat virtually every type of otherwise very troublesome lien problems. It can stop all collection efforts on back support obligations (unlike Chapter 7), including the foreclosure of that lien, and force your ex-spouse or support enforcement entity to wait its turn as you pay the support arrears based on your ability to pay. Chapter 13 can sometimes discharge the taxes underlying a tax lien, paying little or nothing on that lien, with a release of that lien when your case is finished. Other liens can be handled in similar ways to your benefit.
Bankruptcy often gives you tools that give you more control over your home and over your financial life than would happen in a short sale. Considering what is at stake, it certainly makes sense to at least consult with an attorney about all your options. After all, an attorney, unlike a realtor (who often works for the other party in the sale), is qualified, AND is legally and ethically obligated, to explain to you all the options for meeting your goals and serving your best interests.