The downturn in the housing market has resulted in upside down mortgages where home owners owe more on their mortgage than their house is worth. In 2022, it is estimated that tens of thousands of American homeowners are trapped in so called under water mortgages, with loan principles exceeding the fair market value of their homes.
Being underwater is not uncommon, but fortunately there are a few strategies to consider when your mortgage is upside down, including bankruptcy when your financial situation is difficult:
- Individuals and families with an upside down mortgage may elect to continue to pay their principle hoping the housing market rebounds. This option works best if there is no immediate need to sell the home.
- When a homeowner is upside down on a mortgage and is having trouble making his or her loan payments, seeking loan modification is an option. A lender may be willing to change the monthly payment, extend the repayment term, reduce the interest rate or even lower the principle balance to prevent foreclosure if a borrower is having trouble making payments and cannot sell a home without a loss.
- Consider a deed in lieu of foreclosure. If a borrower cannot make payments on a home mortgage that is underwater, they may forfeit ownership of their home to the lender to prevent foreclosure and an inevitable hit on their credit report. A deed in lieu of foreclosure can remove liability for any remaining amount owed on the mortgage and waive negative equity. Working with an experienced attorney or professional financial adviser is highly recommended to ensure the agreement is legally executed.
- Refinancing through government sponsored program may be a viable option for homeowners under water on their mortgage, possibly lowering interest rates and extending repayment terms.
Chapter 7 & 13 Bankruptcy
- Chapter 7 bankruptcy will wipe out debt, including mortgage obligations, but filers will lose their home in the process. Although bankruptcy will be recorded on the credit history for a period of time, being proactive demonstrates that the borrower is taking responsibility to mitigate a difficult financial situation when compared to a bank foreclosure. Additionally, a foreclosure may require payment of taxes on any forgiven loan amount where a Chapter 7 bankruptcy would not.
- If a borrower wishes to keep the home, a Chapter 13 bankruptcy may be a better option, especially in cases where there is a second mortgage. A Chapter 13 bankruptcy is a repayment plan where an HELOC may be converted to an unsecured debt, allowing a borrower to repay it for less than owed along with other unsecured debt. At the end of the repayment period, remaining debt may be discharged.
Contact an Experienced Bankruptcy Attorney for Help
If you are dealing with an upside down mortgage on top of other financial difficulties, it is important to understand what strategies are available to you. Contact Peoria bankruptcy lawyer Charles E. Covey for your free consultation at 309-674-8125.
