Even if you don’t think you can stay in your home, Chapter 7 gives you more time to save money for your move, and may buy some leverage.
Both Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” give you surprisingly strong tools for dealing with your mortgage lenders. For example, Chapter 13 can sometimes essentially get rid of a second mortgage and give you years to catch up on your first mortgage, even if you are on the brink of foreclosure. So before you make any decisions about giving up your home, you should find out whether bankruptcy could save it after all.
However, if you are facing a foreclosure you may still decide, after getting legal advice about your options, that you should surrender your house. If so, the following example shows how filing a Chapter 7 bankruptcy at the right time can work to your advantage.
Trevor and Anna are a married couple who bought their first home at the wrong time. In 2006 they’d been married for 5 years, both had been working for the same employer throughout their marriage, they had saved $25,000 for a down payment, and so they decided the time was right for buying a home. They bought a home for $250,000, seemingly within their means, owing a single mortgage of $225,000.
But then the Great Recession hit. The home’s value went down and down until just a few years after their purchase it was worth only $180,000. During this time, Anna’s hours at work were cut back, losing 30% of her income. They cut back on everything else to keep the mortgage current. Then in early 2012, Trevor lost his long-time job. A few months later, they simply did not have enough money for their full mortgage payment, so they sent partial ones. After accepting those for several months, their mortgage lender refused to accept the partial payments, and started threatening to foreclose. They fell way behind on some other debts. After a year of unemployment, Trevor got a new job but one that paid 25% less and is a very long commute from their house. They have not made a mortgage payment for a year, and are in arrears $18,000, including a year of property taxes. They received notice that their foreclosure sale is scheduled for two months from now.
Although property values in their neighborhood have recently stabilized and even gone up a little, Trevor and Anna have no interest in staying in their house. With the arrearage, including late fees and foreclosure costs, and the unpaid property taxes, they owe close to $245,000 on a house still worth no more than $185,000. They can rent for much less than their mortgage payment plus what it would take to catch up on their arrearage. And they’d rather live closer to Trevor’s new job, where Anna has some promising job leads.
More Time to Move and Save for Moving Costs
After hearing from their bankruptcy attorney about what Chapter 13 could and could not do for them and their house, Trevor and Anna decide not to fight to keep it. But they also learn that if they file a Chapter 7 case just before their scheduled foreclosure date, the “automatic stay” of their bankruptcy filing will stop that foreclosure sale. In the meantime, they can save whatever money that they had been paying their other creditors for their future moving costs and rent payments—with appropriate guidance from their attorney to protect that money from their Chapter 7 trustee.
So Trevor and Anna’s bankruptcy is filed and the foreclosure sale is stopped. They have been advised that how much extra time they will be able to stay in their house mostly depends on how aggressive their lender is, as well on the applicable state laws. If the lender is in a big hurry to foreclose, it can file a “motion for relief from stay” at the bankruptcy court asking for permission to reschedule the foreclosure sale. If so, that motion would likely be granted, and the new foreclosure would be scheduled as soon as state law allows it. Under this circumstance, the amount of time gained for staying in the house may be as short as a month or two—which still can be very helpful.
But it’s not unusual for a mortgage lender not be in big hurry to file for “relief from stay.” That could result in Trevor and Anna being able to stay in the home for three, four, or more extra months, giving that much more time for them to keep scraping money together for their moving and rental costs.
In Trevor and Anna’s case, their attorney contacted their mortgage lender because she knew that sometimes it was willing to negotiate a “cash for keys” arrangement. It costs lenders a fair amount in attorney fees and other costs to get “relief from stay” and then to foreclose, so sometimes they are willing to pay their borrower some money in exchange for it getting possession of and title to the house by a certain date. Trevor and Anna knew they would have enough saved for their rental move-in costs within two months after their bankruptcy was filed, so they were happy to get a little extra money to surrender their house at that time.
Besides discharging (legally writing off) all their debts so that they could have the fresh financial start that they needed, they were able to leave their house in a comfortable and orderly fashion. All thanks to a well thought-out and executed Chapter 7 bankruptcy.