Bankruptcy and Foreclosure in Michigan – Part 2 – Deciding Whether to Keep or Give Up Your Home
June 28, 2014
What to do about a home with declining value, facing foreclosure or in foreclosure are common questions and fears of clients considering bankruptcy.
As a Sterling Heights bankruptcy law firm with a founder having nearly 24 years of experience, we have watched this recent downward shift in the stability of Michigan’s economy coupled with plummeting property values increase the number of bankruptcy filings.
Homeowners seeking information about bankruptcy can pretty neatly be divided into three categories:
- Those dead-set on keeping their home
- Those wondering what to do about it
- Those who are ready to bail out
In this part of our discussion we will address clients who do not know what to do about their home and mortgage.
The whole notion of saving or giving up a home really boils down to two questions:
- Is keeping the home financially feasible? And, if so,
- Is keeping the home financially advisable?
When a person is considering the “save it or give it up” question, the first thing we want to know, as their Warren bankruptcy law firm, is whether they have enough money to make their house payment. Let’s face it, everything else aside, if a person has a $1,700 house note and they lost their job, and only has unemployment to live on (and that does not last forever), there may be no way to juggle the bills in order for them to make that payment. In cases where there is clearly not enough income to pay for the home any longer, keeping the home is out of the question. Thus, there is no need to look at question two.
What about someone who can, but just barely, make the house payment? Well, the considerations they have are really not much different from someone who can make the house payment without much trouble. For either of those groups, the question is whether or not keeping the home is financially advisable.
This inquiry begins by asking, how much is the home worth? Answer this: How much would your home sell for? You can get a good, rough idea of the value of your home by visiting Zillow.com, an online real estate database.
Our homeowners are John and Mary. They bought their home in the metro-Detroit area about eight years ago, and they thought they got a good deal on at $180,000. They put 10 percent down, and now, eight years later, they owe about $155,000 on it. A couple of years after they bought it, they could have sold it for $190,000, but now, they would be lucky to get $145,000 for it. They are what we call “upside down.” This means they owe more on the home than it is worth.
Let’s also assume that they can still make their $1,450 house payment each month. For purposes of our discussion, it does not matter whether they can just barely make it, or if making the payment is not too much of a struggle. The point is, each month they have to fork out $1,450 for a home that is upside down and has about $10,000 in negative equity. Should they keep the home?
Before we answer that, let’s consider another fact. John and Mary also have credit cards debt. Even though they can make the house payment, it is hard to pay much more than the minimums their credit cards. They realize they are essentially on a treadmill of debt and not getting ahead. They learn that they qualify for Chapter 7 bankruptcy, which will wipe out all that debt, and now they have to decide whether to include their home in the bankruptcy. This means they have to choose whether to keep the home (essentially excluding it from their bankruptcy case), and therefore remain liable for the payments, or just “include” the home in their case, meaning that they can walk away from it and not owe anything.
John and Mary love their home, and they are quite happy with the school district. They hate the thought of becoming renters again after being homeowners for so long. Nevertheless, they also learn that homes on their block, not very different form theirs, are renting for about $1,200, which is $250 less than they are currently paying. That same $1,450 they spend on their house payment would allow them to rent in an even nicer neighborhood, perhaps with a better school for their kids, or they could stay in their same general area and save $250 each month.
They realize that it will be a long time before the value of their home ever catches up with what they owe on it. It is not likely that the value of their home will go up at all next year, much less by $10,000 dollars. Lots of homes in the neighborhood have been for sale practically forever. If anything, the value might continue to go down.
Back to our question: Should they keep the home?
Emotionally, they might want to, but as a purely financial decision, keeping the home makes no sense. In fact, it makes bad financial sense. Of course, through bankruptcy they could get out from under this anchor of a house whose value might never, or at least any time reasonably soon, catch up with what is owed on it. They could pay out the same money each month for housing and literally move up in the quality of neighborhood in which they live. After all, in 10 years, even if the home’s value rises to match what is owed on it, all they paid in the meantime was nothing more than rent. That money certainly did not buy them any equity. Why not rent in a better neighborhood?
As a bankruptcy law firm with 20 years of experience in Detroit-area, we would say the better choice is to bail out on the house and rent in or around their current neighborhood. If they save $250 each month (the difference between the rental payment of $1,200 and the house payment of $1,450) for a home in the same, or a similar neighborhood, and they put that money away, in just six years they will have put away $18,000 for a down payment on a new home, and probably one in a better neighborhood.
Under the new rules regulating mortgages, a bankruptcy negatively affects a mortgage applicant for just three years. John and Mary, whatever else their financial abilities, will not have to worry about the bankruptcy holding them back. Getting a mortgage after bankruptcy is not that hard. The harder thing, at least for a while, is getting the best interest rate available.
Even if John and Mary only put away half of what they save, in seven years, probably long before the value of the home they gave up rises enough to even match what they owed on it, they will have saved over $10,000 for a down payment.
Now, apply those same facts to someone who can just barely scratch up enough money each month to pay the bill. Even though they will probably not be putting any money away, they will still be able to use that extra $250 to help make ends meet.
Let’s say John and Mary own a home that is worth about as much as they owe on it. What should they do?
Here we need to look more closely at what they can afford. If they can manage the house payment, and even if they need to do a little belt-tightening to do it, then they should seriously consider staying put. They are not “upside down” on the home. Even though they could save a little money by renting down the block, they get some tax credit for the interest they pay on their mortgage, so there is not that much to be saved by bailing out.
If, however, they can just barely scratch up enough each month to make the payment, and, in truth, any extra money in their pockets would be put to good use, then I think they should seriously consider giving the home back to the mortgage company in bankruptcy. This may be their one good chance to get out from under debt they would otherwise be stuck with.
So, we come back to where we began. Our analysis here, just like in the first article, depends on how we answer these two, all-important questions: Is keeping the home financially feasible, and, if so, is it financially advisable?
The job of any Michigan bankruptcy attorney is to help the client arrive at an honest answer to those questions. This is where we can and will help you with an honest review of your situation. Sometimes, the answer is not obvious right away. Sometimes, no one answer is much better (or worse) than another, but, at the Law Office of Jeffrey J. Randa, we do whatever is necessary to help the client arrive at the decision that is best for them.