Monday, December 8, 2008


With the depreciated real estate market, many of my clients wonder if they should continue to pay for a home they can barely afford. Of course, I can't make this business decision for you, but here are some alternatives for you to consider.


1. Stay in the home if you can afford it. Take a hard look at the realities of the numbers. Can you find a new place to live for a lot cheaper? Or, will it be marginally cheaper. Sure, your house is worth less than you owe. But, if you can afford it, stay there. The market has to move up sometime, doesn't it?

2. Try a short sale. To do a short sale, your mortgage company has to agree to the sales price. This can be difficult, if not impossible, if there is a second mortgage. The second mortgage company has to agree to take a very low price, or even nothing at all. Sometimes the second mortgage company will agree to the short sale if the buyer agrees to sign a new promissory note to repay the debt. DON'T DO IT.

3. Deed in Lieu of Foreclosure. This means you give the bank the house instead of them foreclosing on the home. The reality is, banks don't want your home. They are in the business of money, not real estate. They would rather a short sale. Sometimes they will agree to this. But, this cannot be done if there is a second mortgage on the home.

[Note as to numbers 2 and 3: banks are sometimes requiring proof of hardship to accept either a short sale or a deed in lieu of foreclosure. If you are an investor, you may not be able to do either. It is easier to do if it is your primary residence]

4. File Chapter 13 Bankruptcy. Bankruptcy can be used as a tool to strip off a second mortgage. The second mortgage has to be completely unsecured. That is, if the property is worth $200,000, the first mortgage has to be more than $200,000 to "strip" the second mortgage.

Bankruptcy can also be used to catch up on your mortgage. Instead of coming up with a lump sum payment to catch up on payments, bankruptcy can be used to pay the arrearage over time.

5. Modification of mortgage. Banks are trying to make deals to redo the loans. I have yet to see a mortgage amount be reduced in principal. So, if you owe $275,000, you will continue to owe that amount, but the bank may offer a lower interest rate. At the end of the day, you still have to be able to afford the payment.

6. Just walk away from the home. Many people are choosing to walk away from their homes. The ramifications for this action are yet to be brought to light. Many attorneys wonder what will happen 5 years from now. Although the mortgage companies are not trying to collect on the notes for the homes, there is a fear that 4-5 years from now, the notes will be sold to debt buyers who will try to sue you later.

7. Obama to the rescue? The President Elect promises changes. But, will he be able to do it fast enough. One possible change expected to be proposed is allowing bankruptcy judges to value homes at their present values. Great news for me as a bankruptcy attorney, and great news for someone whose home value has plummeted. Under the hoped for legislation, a home owner who owns a home worth $175,000 but owes $300,000 could go to a bankruptcy court and have the judge rewrite the loan for $175,000. It's hard for me to get my head around the machinations of this, so I am doubtful whether it can work. But, we can hope.

As always, the above information should not be relied on to make a decision. Consult an attorney.

1 comment:

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