Bankruptcy and the Upside-Down House: American Dream a Nightmare?

06 Sep Bankruptcy and the Upside-Down House: American Dream a Nightmare?

If you’re planning on filing bankruptcy, you need to weigh all your options before you decide whether you should keep your house, especially if it’s a house you can’t afford or one in which you have no equity. While this decision is somewhat different based on whether you will be filing under Chapter 7 or Chapter 13, the factors you must evaluate are the same.

One of the many challenging tasks a bankruptcy attorney must perform is counseling clients regarding whether they should attempt to keep their house or instead become renters.

Any advice I give is driven by the facts of the case. What are the economics of the situation? For my clients, however, the decision is often motivated by emotions. In some cases, clients have lived in the same house for several years. They like the neighborhood, they have raised their children there, and they are emotionally attached to it. After all, it’s Home Sweet Home.I understand that, and am sensitive to their feelings. But I know that to effectively represent them, I need to help them focus on the facts. Here are some issues to consider when deciding whether or not to keep your house:

  • Do you have any equity in the home? (Equity is the market value of the home, less the amount you owe on any mortgages or other liens on the property.) I call the home “upside down” when you owe more on it than it’s worth. Unfortunately, with the rapid depreciation we’ve had over the last few years, this condition is now all too common. How much sense does it make to continue paying on the upside-down home? Are you just throwing good money after bad?
  • If the house is upside-down, just how upside-down is it? Keeping a home that is only slightly upside down, and has a reasonable monthly payment, is far different than continuing to pay on a home that is substantially upside-down. $10,000 negative equity is one thing; $50,000 or $100,000 is quite another.
  • Can you afford it? Can you really make that payment each month, plus the homeowners insurance and property taxes associated with it?Do you have a variable rate mortgage, so that your monthly payment has unpredictable or unaffordable increases? Or is there a large balloon payment coming due any time soon?
  • Are there additional expenses you have to incur if you keep the house, such as high utility bills, costly repairs, or much-needed renovations?
  • How will making those payments and incurring those expenses affect your financial objectives? How much would you have to pay to rent suitable housing? Will it cost more or less than your current house payment (including taxes and insurance)? What about when you factor in all those repairs like the new roof, new furnace, and that wiring upgrade you need?
  • Where is your home located? How far do you have to drive to work? Maybe that long commute was affordable a few years ago but not any more. A long commute not only costs gas, but also costs you in depreciation and auto maintenance costs such as tires and oil changes.
  • How important is it for your children to remain in their current school district? Is it possible that you might even find a better school district by moving a few miles?

You should evaluate these and other important factors with your bankruptcy attorney before making the decision to keep or surrender your home. Home ownership is the American dream, but not when it becomes a financial nightmare. Sometimes it’s best to rent for a while. Most importantly, you need to consult with an attorney, who will help you understand the facts, and be as emotionally detached as possible when making this decision.

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Russell A. DeMott is a Charleston, South Carolina bankruptcy lawyer who represents consumer debtors in Chapter 7 and Chapter 13 bankruptcy. He is the author of the Charleston Bankruptcy Blog. He is also a member of the South Carolina Bankruptcy Blog. He files bankruptcy cases for clients in the Charleston, South Carolina division, which runs from Myrtle Beach to Beaufort. The DeMott Law Firm also represents clients in foreclosure defense and mortgage modification. You can also connect with Russ on Google Plus Russell DeMott. Russ can be contacted directly at (843) 695-0830 or by email at russ@demottlawfirm.com.
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