Behind in Your Mortgage? (Part 1)

12 Jul Behind in Your Mortgage? (Part 1)

There are basically four choices for a homeowner who is behind in his house payments.

1. You can get caught up by paying the arrearage. Most mortgage companies want you to do this all at once, but if you can’t afford to come up with that much in cash, you can seek bankruptcy protection (typically a Chapter 13 bankruptcy) to spread the amount you are behind over several years.

2. You can seek, and sometimes receive a mortgage modification. These are pretty hard to get, in spite of the fact that there are federal and state laws to encourage such programs. But the lenders have all sorts of conditions placed on the application process and there is no legal requirement that anyone be granted a modification. Worse, there is no court, judge or administrator to oversee the process.

3. You can do a short sale. This requires the mortgage company to reduce their loan so that you can sell your house to someone for its true value in today’s market.

4. You can walk away and allow the property to be foreclosed.

There are advantages and disadvantages to all of the above, but only 1. and 2. will allow you to keep your home.

Generally if you do want to keep the home, try the mortgage modification program as a first step. If that works realistically (something that actually reduces your payments so you can afford to stay there and doesn’t just delay the inevitable), great. If not, you can try 1. – paying off the arrears.

To pay off the arrears, you either need to have a lump sum of money or to file bankruptcy. I don’t know of any mortgage companies that will allow you to make payments if you’ve gotten behind except under very limited circumstances, and those usually include being completely caught up in 90 days.

By filing a chapter 13 or chapter 11 bankruptcy, you can spread the arrears out over the length of the bankruptcy plan. Thus, a $10,000 arrearage becomes slightly less than $300 a month for 3 years or $166 a month for 5 years. That’s usually a lot more doable than coming up with the $10,000 in cash.

Please see Part 2 for a discussion of what you can do if you are willing to leave the house.

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Douglas Jacobs is a California bankruptcy attorney and partner in the Chico law firm of Jacobs, Anderson, Potter & Chaplin. Since 1988, Mr. Jacobs has taught Constitutional law and Debtor-Creditor/Bankruptcy law at the Cal Northern School of Law. He has served as Dean of Students since 1994. He is a frequent lecturer on the subject of consumer bankruptcy law, and has spoken at both state and national levels.
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