If You’re Going To Lose Your Home, Why Not Lose Your Debts Too? (Or When Life Gives You A Lemon, Make Lemonade)

The NY Times has an interesting article about homeowners abandoning their mortgages. My firm has encountered this more and more recently. Many homeowners do not realize that they actually can turn their bad situation into a good one.

With the collapse of the real estate market, many New Yorkers have little or no equity. Historically, we have helped homeowners try to save their home with Chapter 13 bankruptcy repayment plans, loan modifications, or forbearance agreements. However, in some cases, a homeowner may not qualify for this relief or simply may not have enough income to keep the home under any set of circumstances. Because of this, we are seeing a new trend where homeowners are increasingly choosing to surrender their home to their mortgage lender in Chapter 13 bankruptcy to fully satisfy their mortgage. Chapter 13 allows a debtor to surrender the collateral to the secured creditor (mortgage lender) as part of the plan, whereas outside of Chapter 13 a mortgage lender may actually reject a deed in lieu of foreclosure (attempt to surrender the property).

A “surrender” plan in Chapter 13 can be useful for several reasons. It can avoid foreclosure, a foreclosure judgment, and even a deficiency judgment for any shortfall that the homeowner might otherwise still owe after an auction. It also may enable the homeowner to pay back other debts, such as unsecured credit cards, at a very small percentage, perhaps 10%. In those cases, the homeowner may be able to discharge the rest of the unsecured debts, perhaps 90%. An attorney needs to review the homeowners budget, asset and liabilities to determine eligibility and the possible savings to the homeowners.

Many clients considering this often ask me how long they may be able to stay in their home if they file for Chapter 13 and propose to surrender the home and wipe out most of the unsecured debts. I have seen that homeowners typically can get anywhere from 3 to 5 months time to stay in the home. This is due to the fact that many lenders don’t want to take back the home unless they have to and they may also fear a potential violation of the automatic stay if they actually take the property back prior to the confirmation hearing.

So, if you are a homeowner who is considering that maybe it’s time to just walk away from your mortgage and start fresh, you might want to call us to discuss whether a Chapter 13 can help you accomplish your goal. If you are going to lose your home anyway, why not lose your debts too? You might as well get the benefits of a few months to find an apartment and try to wipe out unsecured credit card debts at the same time.

Here is how I put it to clients who have no equity. I say this – if I were to approach you on the street and say that I have a great investment opportunity for you, and if I were to say that all you have to do is to pay me $3500 per month for the next 5 or 10 years and at the end of that time, I will give you nothing back, would you take that deal? Of course not. But that is, in a sense exatly what the homeowner with no equity does. I realize that there are emotional factors to consider but from a purely economic perspective many homeowners who struggle to save a home that is essentially worthless are making a very bad decision.
If that same homeowner were to surrender the home and wipe out thousands of dollars of credit card debts in a 3 to 5 year plan, and then also rent an apartment for say $1500 per month and save the $2000 per month that were no longer going towards the mortgage, and put all that extra money in the bank, after 10 years the homeowner would have $240,000 saved, plus interest, while having no debts at all (zero!). Who wouldn’t want that?

If that same homeowner were to hold on to the house for ten more years and struggle with the payments, chances are the home would have appreciated very little, if at all, and the homeowner would have nothing saved in the bank.

Ask yourself if it is time to move on and clean things up. If it’s time, feel free to call my paralegal at 212-764-7250 x 203 and we’ll schedule a time to review your case for free by phone. More complex situations may require an in-office visit.

Here is the NY Times article.