Bankruptcy, Modification, and Foreclosure

11 Aug Bankruptcy, Modification, and Foreclosure

In my Bankruptcy practice, I see people every day in the midst of a homeowner’s dilemma. Try to save the house, walk away, file bankruptcy, do a modification, or what? Most often, I spend time with them simply dispelling myths!

Here are seven of my favorites:

1. Modification is a federal program – they have to give me one. Wrong. Fewer than 30% of the applications for modification are granted. And then, only after an arduous process, often lasting months.

2. Modification will reduce the principal amount owed on the home. Wrong. Occasionally, the bank might reduce the principal owed, but it’s very rare. Most of the time, not even a bankruptcy can reduce the principal owed on your primary residence. There is good news on the horizon though as more banks are seriously looking into principal reductions to avoid foreclosures.

3. If I file for bankruptcy, I won’t be able to complete my modification. Wrong. The modification process can continue or even be started after filing bankruptcy. And, getting rid of credit card or other unsecured debt almost always helps the process since it will free income to be used for house payments.

4. Applying for a modification will stop a foreclosure. Wrong. Most often the foreclosure process continues while a modification application is being considered. Sometimes the sale date will be postponed, but the process will go forward unless the modification is granted. Filing bankruptcy always stops (or at least postpones) a foreclosure.

5. A modification will get rid of missed payments. Wrong. Most of the time, those payments will be added on to the loan to be paid at the end of the term. Filing bankruptcy, can, however, under some circumstances, get rid of or reduce some of the money owed on a house.

6. Filing bankruptcy is worse on my credit than a foreclosure. Wrong. It’s usually just the opposite – a foreclosure is worse for your credit score than filing bankruptcy.

7. If the house is foreclosed, I will have to pay the bank the money that I owed that they didn’t receive when they sold the house. Wrong. Most states have anti-deficiency statutes meaning that the bank that holds the first mortgage can’t come after the homeowner after a foreclosure sale. Some states don’t have these statutes, but filing bankruptcy will get rid of anything owed the bank.

Talk with an attorney where you live who is familiar with filing bankruptcy and real estate laws.


image credit: james.thompson

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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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