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Bankruptcy and Foreclosure in Michigan – Part 3 – Getting Out of Your Mortgage

June 29, 2014

What do you do when you know you can no longer afford your home? What about those who may be able to afford their home, but, for whatever reason (the home has lost too much value, or is a “money pit”) just want to get out from under it? As a Michigan bankruptcy law firm with nearly 25 years of experience dealing with these issues, our team has learned that answering those questions requires asking a few first.

Only then can we look at answers and options. In this final installment, we will examine individuals who want to get out of their mortgage, and how they can do that.

Let’s first define who we are talking about. It goes without saying that anyone can just “give up” their home and walk away from a mortgage. The home will go into foreclosure, and unless the home sells for at least as much is owed on it (which is unlikely for most homeowners), then they will be liable for the deficiency, which is the difference between what the home ultimately sold for and what the mortgage balance was. At some point, they may be sued for that amount.

Situation One

 

We will be discussing those people who just want out of their mortgage without owing anything. They want to dump the house and walk away without the debt. In our experience as a bankruptcy law firm in Macomb County, we usually hear from people in this group after they have made some inquires about the possibility of selling the home. They usually learn that the current market value, even if they could find a buyer, would not be enough to pay off the mortgage. Of course, these people would love to have the mortgage company take the home back and call the whole thing even. That, of course, does not happen

So, within the framework of bankruptcy, we are talking about a caller who wants to know if, and how, bankruptcy can help them get out from under this house and not owe anything.

The first thing we need to know is how much income the caller has. If it is one spouse or partner calling, we’ll want to know, what is the household income?

Next, we need to learn about the caller’s expenses. In our office, we will do that analysis over the phone to determine if a person qualifies for Chapter 7 bankruptcy. If a caller does not have too much money coming in, and does not have too much money left over at the end of the month, then they are eligible to have their debt wiped away in Chapter 7 bankruptcy. Of course, we will have to figure into that equation what the caller’s housing expense will be once they give up their current home.

Many of the calls that come into our office are from people who are coming up short each month. Maybe their home is not yet in foreclosure, but they are worried about it. Maybe they have already missed a few payments, maybe they haven’t, at least yet. In other cases, the caller is already in foreclosure. Sometimes, a person will call after the home is already gone and they have moved out. The good news here is that it does not matter where the caller falls in this spectrum, because Chapter 7 bankruptcy allows them to discharge any obligation they might, will, or do have. In other words, even a person who is not yet behind on their payments can walk away from their home and never have to worry about owing anything. This is true even though we do not know how much the home will eventually sell for, and how much the deficiency balance will be.

Bankruptcy discharges claims. That means a person could, in theory, owe $1 after the foreclosure, or even $500,000, and it does not matter. It is the claim for the deficiency, and not the specific amount, that is wiped out by the bankruptcy.

Our office also receives a lot of calls from people who realize that they are “upside down, meaning they owe more on the home than it is worth. Another way to describe this is to say that they have “negative equity” on their home. It does not matter whether people in this group are current or behind on their mortgage, or even if they have no problems making their payment each month. This group of callers just wants to get out of what they see as a bad investment.

Perhaps they realize that the value of the home will not catch up to the mortgage balance for a long time. They figure, “why should I make this payment each month, when even six or seven years from now I will still owe more on the house than it will be worth?” They realize that even if they rent a home for the same amount as they are spending on the mortgage each month, at least they won’t wind up still “in the bucket” six or seven, or more years down the road.

Given what has happened to home values throughout the country, much less the Tri-County Detroit area, chances are good that many of these callers could rent in their own neighborhoods for less than their current mortgage payment.

Imagine if a caller who has a house payment of $1,300 each month discovers that they can rent in their own (or a similar) neighborhood for about $1,000 per month. They then can consider two options if they qualify for Chapter 7 bankruptcy and decide to go that route and get out of their current mortgage.

First, they can move “down the block,” and save that extra $300 each month. If they put that extra $300 away for just four years, they will have socked away more than $14,000 for a down payment on a new house! If they are coming up short each month, then that extra $300 in their pockets sure won’t do them any harm.

Second, and while perhaps not the best financial move, that person could, instead of renting “down the block” and saving $300 each month, use the whole $1,300 for rent in a better neighborhood. Anyone who has been following home prices in Michigan, or even just in their own neighborhood, already knows that there’s a good chance that, given the record drop in home values we have suffered here, the caller (and pretty much anyone else paying on a mortgage) could move into a better neighborhood for that same amount.

My recommendation as a bankruptcy lawyer would be to rent for less in their own, or a similar Metro-Detroit area neighborhood, and either use the extra $300 to live on, or to put away for a down payment on a new home. Getting a new mortgage after bankruptcy is not a big deal. People do it all the time.

A friend of the Law Office of Jeffrey J. Randa, has been a mortgage broker his entire professional life. He tells us that under the current (post real-estate crash, credit-meltdown) guidelines for writing new mortgages, a person with a bankruptcy on their record only has to wait three years (it used to be two years before the mortgage meltdown) in order to qualify for a regular-interest-rate, conventional Mortgage.

Situation Two

 

Finally, let’s look at one more, but far less common situation: A person calls who, at the end of the month, after they pay their living expenses, does not have any, or at least very much, money left over. Assume that person, in a family or household of four, has seen a drop in income due to a cut in hours at work. Now, assume that when they bought their home, they were making better money. Let’s say that they were able, a number of years ago, to afford a $2,400 per month house payment. Given their current income and the drop in property values, paying this bill is a hardship that keeps them cash-strapped every month.

That caller wants to get out of their mortgage and walk away owing nothing. When we take into account that under the bankruptcy rules (which use the IRS standards), a family of four in Macomb County, for example, is allowed about $1,636 per month for housing, we suddenly realize that even if they rent a place for $1,700 per month, they start off with an extra $700 left over. If they can’t “eat up” that money in their other expenses (and you can’t just make them up; they’re governed by all sorts of rules and limitations), they will have too much money left over to qualify for Chapter 7 bankruptcy.

Their only alternative is to file what is called a Chapter 13 bankruptcy, which involves repaying a percentage of their debt (somewhere between 25 percent to 100 percent, depending on how much money they have left over after deducting allowable monthly expenses), over a period of three to five years.

The Law Office of Jeffrey J. Randa does not handle Chapter 13 cases, primarily because they are long and difficult, and too few actually work out all the way to completion. When we determine someone does not qualify to “walk away” from their debt in a Chapter 7 bankruptcy, we will make sure they understand why that is the case, and at least help the caller by making a referral to another skilled Detroit chapter 13 bankruptcy practitioner. Because the Law Office of Jeffrey J. Randa does not file Chapter 13 cases, so you can be darn sure that we will examine every option to get the person qualified to “wipe out” their debt in a Chapter 7 bankruptcy before we conclude we cannot help them.

Fortunately, as noted, those calls are the exception rather than the rule. Most people we speak with only wish they had too much money left over at the end of the month.

Whatever the particular situation, you get the idea that there are all kinds of scenarios where a person can find themselves in a position to realize that keeping a particular home is not a wise financial move.

If that person can qualify for Chapter 7 bankruptcy, then they can dump the house, get out of the mortgage, and get what is known as a “fresh start.” If they can save a decent chunk of money each month by cutting their housing expense, in a few years they will likely have enough for a down payment and can get a new mortgage. If they cannot save any, or much money, even by lowering their monthly housing expense, then it just goes to prove that the house was costing too much based upon their income.

Bankruptcy Is An Option For You

 

At the Law Office of Jeffrey J. Randa, we do not know if we are able to help someone until we examine their situation, which we do right over the phone, when they call, making it both easy and convenient. We expect that anyone who calls our office will want to continue to learn about and look at their options, and/or may just want to “think about it” before deciding to make an appointment. Any bankruptcy attorney trying to “hook” someone in their Michigan office before knowing if, or how they can help them, seems too eager to get them in the “client chair.” Run the other way.

Above everything else, anyone dealing with these issues should take the time to learn as much as they can about their options. If getting out of debt is part of that consideration, they should speak with as many bankruptcy attorneys as they can. They should call around until they find someone they like, with whom they feel comfortable, and whose fees are reasonable. We’re confident that, after you’ve called around, you’ll like us the best.

Of course, as part of that calling around, we hope a person looking for the help of a Detroit bankruptcy lawyer contacts the Law Office of Jeffrey J. Randa as well. This can be done either by phone or email. If someone chooses to contact us by email, they do not even have to leave a phone number. If they do not contact our office, well, then they don’t.

Even so, we sincerely hope that anyone with these considerations will do their homework. It is not fun, it is time-consuming, but it is necessary. Only with a clear understanding of their situation can they determine what their options are, and which of those is best for them.

At the Law Office of Jeffrey J. Randa, a Chapter 7 bankruptcy costs a grand total of $1,300: $965 for the legal fee, plus the federal court filing fee of $335.  There is a $50 discount if the fee is paid up front.

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