The interplay of Chapter 7 Bankruptcy and foreclosure defense offers homeowners the ability to squeeze the equity out of their home, even if it is an “overvalued” property. A home is “overvalued” when the owner has no equity in the house. In other words, after the property sale, the owner comes out of the closing with no money. This is called a short sale because the mortgage settlement payment exceeds the home’s value, and therefore the payoff is quick.
Most homeowners believe their only option is a retrofit. However, the interaction of these two areas of law provides an option that few homeowners know they have.
After a Chapter 7 Bankruptcy, assuming they qualify, debtors have no further personal liability for unsecured debt or their mortgage debt.
After a Chapter 7 Bankruptcy, a mortgage lender never looks to the homeowner for personal liability for the mortgage debt again. The owner is not responsible for the deficiency of the mortgage balance.
The mortgage lien remains against the property after chapter 7 and is still subject to foreclosure. A good foreclosure defense could prevent foreclosure for years if a lender initiates a foreclosure action after filing for Chapter 7 bankruptcy.
After bankruptcy, homeowners can accumulate savings without worrying about creditors trying to collect from theThe mortgage lender can never touch those savings because of a lack of mortgage liability.
Many clients have asked me to help them modify a mortgage on an ” overvalued home.” They state, “If only the lender could lower my monthly mortgage payment to $2,000, I could avoid foreclosure and stay in my home.”
The problem’s not his house. Although his name appears on the deed, the bank is the “owner” of the house because it is “overvalued.” After the home sale, the owner leaves the closing with no money.
So for the next five years, assuming you get a mortgage modification, you expect to pay $2,000 a month for 60 months to live in a house that will never be yours—the more “overvalued” the place, the worse the deal.
Now: Compare a foreclosure defense that allows homeowners to stay in the home for five years or as long as the foreclosure lasted without paying mortgage payments. It can take up to 5 years to complete a foreclosure action, sometimes less, sometimes more.
If the owner can accumulate and save all these payments, they can be turned over after five years, with up to $120,000 in the bank. Now they have managed to get $120,000 out of their house, even though it is “overvalued,” and they could never have sold it and deposited it in the bank.
