Filing for bankruptcy in the state of California is one way in which a person can gain freedom from their debts. Even so, it is essential to consider all the benefits and repercussions that come with it to make the right decision. One of the outcomes you could get out of bankruptcy is the possibility of losing some of your valuable assets. Losing a home is a risk mainly if you have applied for California Chapter 7 bankruptcy, in which case your trustees may dispose of your home to raise money to pay off some of your debts.
However, there is always a way out. Renegotiating your mortgage is one way in which you might save your home. For this to work, you need to work hand-in-hand with an experienced bankruptcy attorney. At Los Angeles Bankruptcy Attorney, we have excellent skills and experience in handling all types of California bankruptcies. Therefore, you may benefit greatly from our help and advice. If you are in Los Angeles, CA, and are considering filing for bankruptcy but are afraid of losing your home, get in touch with us today.
Importance of Safeguarding Your Home After Bankruptcy
When navigating your options regarding bankruptcy, it is vital to think about all those assets you might lose in the process and those that you could salvage. Issues concerning mortgages are usually necessary because the decision you will make in the end will determine your living situation after your bankruptcy application has been approved. For many people, losing a home is a big deal, especially if you have a family. It is also a big deal if you have invested a lot of money, time, and effort into it. That is why California bankruptcy gives homeowners several options that could help you keep some of your valuable assets.
Assets such as a home are usually more valuable when left in the hands of their owners. If a home is foreclosed, its value is lost to more than 30 and sometimes 50%. This loss is usually on top of the damage that the home has already suffered as a result of its owner's economic downturn. For instance, if a person bought a home at $400,000, and they can sell it today for $360,000, the cost of the house could go down to up to $180,000 if it is foreclosed.
In addition to losing the value of the home, foreclosure is a long, tedious, and time-consuming process. You might have to wait for a while before your home could be foreclosed so you can move on with your plans. Before then, your debts will still be real, and the pressure to pay them will always be there. The longer it takes to foreclose the home, the more expenses it accumulates, which means that its value will continue going down. It is because it is expensive to maintain an empty house. For these and many other reasons, it is advisable to renegotiate your mortgage and keep your home after bankruptcy.
Renegotiating Home Mortgages
Since foreclosures are costly, mortgage lenders are advised to avoid these costs by allowing homeowners to renegotiate their mortgages after bankruptcy. However, there is a problem because most home mortgages are usually securitized. It means that homeowners can no longer call their bank if they want to renegotiate their mortgage loans without going through their loan servicers. The loan servicer is the person who acts on behalf of mortgage security holders and has a right to share in your payments. He/she will lose more if the homeowner tries to renegotiate their home loan but will not miss a dime if the homeowner defaults repayment.
What is left now is for the government to force the renegotiations for the sake of homeowners who are unable to complete their repayments for one reason or the other. The homeowner, together with his/her mortgage trustees, will come up with a plan that will help them pay off the remaining amount of their mortgage loan according to the home's current value. Reducing the home value to its current market value will significantly reduce the amount of money the homeowner is required to pay in the mortgage loan. In exchange for this, the homeowner will promise to give his/her lender at least 50% of any property appreciation that will occur in the future. Renegotiations will involve the determination of the current market value of the home as well as its future value.
This is an attractive proposition for homeowners because it enables them to save a valuable asset they have acquired for themselves and also gives them a chance to pay way less in mortgage loans than they already owe. Suppose a homeowner has a mortgage loan of $360,000 on a home bought at $400,000. The home's current market value is $200,000. With mortgage renegotiation, the homeowner may receive a price reduction on their home of up to $160,000 on condition that he/she will give a portion of the home’s future appreciation value to the lender.
Renegotiating mortgage loans is also beneficial to mortgage lenders in more ways than one. If a homeowner is unable to pay back their mortgage loan after bankruptcy, the only option left for the lender is to foreclose the home to recover some of the money they are owed. As earlier mentioned, seizing a home will give the loan lender the smallest amount of money they can get for the house, which in itself is a loss. In most cases, foreclosures are done on homes whose market value has declined by between 30 and 50%. If the foreclosure takes long, the value of the house will be lower than its actual market value.
Allowing a homeowner to renegotiate their home loan will give the mortgage lender the current market value of the home as well as a promise of some share if the value increases in the future. This will be way more than they could have fetched from a foreclosure.
Another advantage is that renegotiating mortgage loans does not cost as much as a foreclosure. It is a low-cost way for the mortgage lender to recover their money after bankruptcy. It can also be included in bankruptcy only to await the approval of the bankruptcy court. If you are filing for California Chapter 13 bankruptcy and you are a homeowner, you may benefit significantly from a reduction of your mortgage to the market value of your home.
Mortgage Modification with California Chapter 13 Bankruptcy
With the increasing cost of living in the country today, it is possible to find oneself unable to repay your loans. Filing for bankruptcy enables you to obtain financial relief from some of your debts. It also gives you a chance to reorganize our debts to make them easy to repay. The state of California offers several options for people who are looking for ways in which they can enjoy this freedom, among them Chapter 13 Bankruptcy. Under this type of bankruptcy, the bankruptcy court appoints trustees to work alongside the person to help them come up with a repayment plan that will see them free of debts in a few years.
Modifying a person's mortgage and filing for Chapter 13 bankruptcy are two distinct things, though both can be used to help a person that is drowning in debts to keep their home despite their financial situation. Chapter 13 bankruptcy is preferred by many because it provides homeowners with the possibility of protecting their valuable investments. Through this type of bankruptcy, you can make a current mortgage that is past due. Again, it can help you stop foreclosure on your property and give you enough time to negotiate a mortgage amendment with your creditor.
California Chapter 13 bankruptcy gives debtors more time to catch up with on some of their payments. The court allows you to come up with a plan, which it approves, and with which you will be making monthly disbursements over a period of between 3 and 5 years. The difference between Chapter 13 and Chapter 7 bankruptcies is that Chapter 7 is much faster. With Chapter 7, your assets are used to pay off your debts, and in a few months, you are debt-free. However, Chapter 7 bankruptcy does not give the debtor a chance to keep their property. It is, therefore, possible to lose your home if you choose this type of bankruptcy.
How to Apply for Mortgage Modification
Mortgage arrears are some of the debts you will be required to include in your Chapter 13 debts repayment plan. However, the court will give you a chance to negotiate with your mortgage lender for a modification to make it easy for you to pay back the debt. Your attorney will advise you to first apply for Chapter 13 bankruptcy to stop foreclosure on your home, and then you can apply for a mortgage revision with your creditor. By requesting a loan modification, you are merely asking your lender to amend the terms and conditions of your loan.
Your lender can do this by adjusting your interests to reduce the number of monthly repayments you will be making. Alternatively, this can be achieved by adding all the missed repayments to your mortgage arrears, increasing your repayment period. Once your lender agrees with your proposal, he/she will make your current mortgage loan. You will then be required to present the modification before a bankruptcy court for its approval. Note that there is no guarantee that the court will approve this amendment. It will only happen if the judge feels that the modification is reasonable. If not, you will have to seek alternative ways to protect your home from foreclosure.
In most cases, bankruptcy courts approve mortgage modifications. When this happens, the debtor will be required to suggest a new plan under Chapter 13 bankruptcy that will remove all their previous mortgage arrears and any other related debt that was contained within the new mortgage. This may consist of property taxes that are past due. You will then be required to follow the new plan in making monthly repayments on your mortgage until the close of your repayment plan. After that, you will get to enjoy the discharge benefits provided by filing for California chapter 13 bankruptcy.
Do You Have to Follow Through with Bankruptcy After Modification?
It depends on the number of debts you owe and whether or not you can pay them back. If your reason to file for bankruptcy were mainly because of an overwhelming mortgage loan, your attorney would be able to advise you on the way forward after getting new mortgage terms. Sometimes it does not make sense to proceed with the bankruptcy case, in which case you will drop it and go on with your life. Here are some of the considerations you need to make to determine whether or not to proceed with your bankruptcy case:
- How much credit card debt do you have and how much of it can be discharged in Chapter 13
- Do you have a chance to discharge some of your debts in bankruptcy chapter 7
- Do you have support arrears or income tax debts to consider
- If, by any chance, you dismiss your chapter 13 case and file for bankruptcy chapter 7, will you be required to renegotiate the car loan you were previously paying through the chapter 13 plan?
- Are you able to work directly with those you owe without the safeguarding of a bankruptcy court?
Note that if you dismiss your bankruptcy case, you will no longer enjoy the court’s protection. It means that you will be dealing directly with your lenders. In that case, your creditors will be allowed to take any action against you for missed repayments, including applying a collection action as allowed by both federal and state law.
Mortgage Modification Processes Available Under Chapter 13 Bankruptcy
There are mainly two processes available under Chapter 13 bankruptcy for homeowners who want to renegotiate their mortgages. They are:
- Lien Stripping
As discussed above, cramdown involves paying only the current value of your home through a court-approved plan. The current value of your property will be predetermined, and then the remainder of your mortgage will be paid back together with other secured loans. The good thing about this is that the homeowner is allowed to keep their home while paying back only what it is worth. Anything you owe in mortgage above the current value of the house is discharged, together with other unsecured debts.
The challenge in this process is that not all people qualify to take advantage of a cramdown. The homeowner is required to pay the entire amount of reduced loan within the period of the plan, which is not possible for many people, especially those whose income is not enough to pay off the entire debt.
Lien stripping, on the other hand, allows the homeowner to remove a second or proceeding mortgage when he/she owes more than the security used in securing their mortgage loan. It aims at ensuring that there will be no money available to clear the stripped mortgage in the event the homeowner decides to sell the home. If, for instance, you owe a home worth $200,000, and your first mortgage was worth $220,000, and the second one was worth $30,000. It means that if you sold the home, the available funds would only be able to pay off the first mortgage, leaving nothing for the second mortgage.
In the course of your mortgage payment plan, you will pay off the second mortgage together with your other unsecured loans, such as medical bills, credit card debts, and personal loans. Since this payment will be based on the amount of income you are receiving, there is no way you will be paying more than you would have if you had not stripped your mortgage loan. The obligation to repay your second mortgage will go away after you have completed your payment plan.
Note that not all home loans are eligible for cramdown or lien stripping. To improve your chances of getting an opportunity to renegotiate your mortgage and protect your home, you need to work closely with an experienced bankruptcy attorney. With his/her help and advice, you should be able to find a way out of your situation before your property is foreclosed.
Filing for bankruptcy is an excellent solution for any person that is struggling with debt repayment. However, it could strip you of your valuable assets, leaving you with no place to live. Protecting your home should be first on your list of priorities when making decisions. That is why you need to work closely with a competent bankruptcy attorney. At Los Angeles Bankruptcy Attorney, we have a team that is willing and ready to take you through the process and ensure that you have successfully renegotiated your home mortgage and safeguarded your home. Call us at 424-285-5525 if you are in Los Angeles, CA, and let us walk with you through the legal process.
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