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Bankruptcy could provide some relief to underwater homeowners

It appears that the economy is improving, but many homeowners in Florida have yet to see it. Across the country, nearly 9.1 million homeowners owe more than 25 percent of what their home is worth. Further, many of these families are behind on their mortgage payments to the point where foreclosure is imminent. Filing for bankruptcy could provide homeowners with the time and space they need to make some decisions regarding their homes.

When a bankruptcy is filed, all collection activities, including lawsuits such as foreclosures, are put on hold, pending the further order of the Bankruptcy Court. Mortgage lenders may ultimately be able to proceed with a foreclosure if they receive permission from the court, but that takes time. That time can be used to make another attempt at keeping a home or to make the decision to walk away, depending upon which Chapter of the Bankruptcy Code has been selected.

Individuals most often file one of two types of bankruptcy — Chapter 7 or Chapter 13. Chapter 7 bankruptcies typically liquidate debts, and the filer may ultimately receive a discharge concerning any unsecured debts. Chapter 13 bankruptcies allow the filer to reorganize his or her debts under a court-monitored repayment plan. Lenders must halt foreclosures in both types of bankruptcy, but the reprieve is temporary in a Chapter 7. As long as payments are being made under an approved Chapter 13 plan, foreclosures are frozen.

Filing a Chapter 13 bankruptcy could provide a homeowner who wants to keep his or her home with the income needed to resume making mortgage payments. In a Chapter 7 bankruptcy, the home could potentially be sold in order to pay the filer’s debts unless the homeowner qualifies for the Florida homestead exemption. Generally, a home cannot exceed a certain size, and the homeowner must have owned the home for a minimum of 1,215 days. If the home has not been owned for at least that long, only $146,450 of the home’s value is exempt. Of course, there are exceptions to the homestead exemption, so a thorough review of an individual’s circumstances is necessary.

Source: The Huffington Post, “Bankruptcy: The Foreclosure Kill Switch“, Jorge Newbery, April 22, 2014

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