When Does It Make Sense to Let the House Go?

14 Oct When Does It Make Sense to Let the House Go?

You’re behind on your mortgage, and a foreclosure is threatened. You speak with a bankruptcy attorney, and are eligible for a Chapter 13, which will let you catch up on the payments and save the house. But should you?

I speak with clients every day in this situation, and one of the most important things I do is to counsel them about whether it makes economic sense for them to save the house or not. (Saving the house for emotional reasons is another story.) Here are three of the factors we look at:

1. Is the house “under water”? If you owe a lot more than the house is worth, you can spend a *lot* of money catching up payments, and at the end you don’t have much to show for it.

For example, one client had a $125,000 mortgage, but the house was worth less than $10,000. If he’d paid the $20,000 in arrearages through the Chapter 13 Plan, he’d still have a house worth $10,000 and a $105,000 mortgage.

The housing market isn’t going to increase the value of his property *that* much, and he won’t be able to sell it. Surrendering the property made the most sense, and he’ll be able to save the $20,000 to use to purchase a new property down the road.

2. If the house is in very poor condition, you may be able to file a Chapter 7 and walk away from it, without having to come up with money for repairs.

3. If you simply don’t have enough money both to resume your monthly mortgage payments *and* pay the Chapter 13 Trustee the required monthly payment, you’re spending money to just delay the inevitable.

Chapter 13’s work best when you are able to make the required payments and have a benefit (such as equity in your house) at the end of the Plan. And if you file a Chapter 7, it’s over sooner and you can begin rebuilding that much quicker.

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Brett Weiss, a senior partner at Chung & Press, LLC, represents people and businesses in all phases of bankruptcy. He has experience in complex individual Chapter 7, Chapter 11 and Chapter 13 bankruptcy cases, and in Chapter 11 small business restructuring and reorganization. Mr. Weiss lectures nationally on bankruptcy issues. He has testified before the Federal Bankruptcy Rules Committee, the Consumer Financial Protection Bureau, and has twice testified before Congress on bankruptcy and credit issues. Brett Weiss is the co-author of Chapter 11 for Individual Debtors, and has written Not Dead Yet: Bankruptcy After BAPCPA, for the Maryland Bar Journal, as well as hundreds of blogs for the Bankruptcy Law Network. With his law partner, he recorded a 13-hour basic bankruptcy training series, and leads intensive three-day Chapter 11 training boot camps. Mr. Weiss has received international media attention in connection with his work. He was interviewed by Barbara Walters on The View, has appeared on the Today Show, Good Morning America, ABC News with Peter Jennings, the Montel Williams Show, National Public Radio, AARP-TV, the BBC World Service, German state television, and numerous local radio and television programs, and been quoted in Money magazine, The Washington Post and The Baltimore Sun, among others. Brett Weiss is the Maryland State Chair for the National Association of Consumer Bankruptcy Attorneys, a founding member of the Bankruptcy Law Network, on the board of the Maryland State Bar Consumer Bankruptcy Council, and a member of the American Bankruptcy Institute, the Bankruptcy Bar Association of Maryland, and the Civil Justice Network. He has been recognized as a “Super Lawyer” every year since 2007 for Maryland and the District of Columbia, and in 2011 received the Distinguished Service Award from the National Association of Consumer Bankruptcy Attorneys for his work on behalf of consumers across the country. Mr. Weiss is admitted to practice before Maryland and District of Columbia federal and state courts, the United States Courts of Appeals for the DC, Fourth and Eighth Circuits, The United States Tax Court, and the Supreme Court of the United States, and has been practicing law since 1983.
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