Jul 10
8
Many people fear the idea of filing for bankruptcy. This fear can be exacerbated by the thought of losing one’s home and becoming homeless in the process. Many people’s entire “wealth” is based on the value of their home. The stigma of filing for bankruptcy to some people seems so shameful, coupled with the fear of losing their dignity in front of other people. To that end, many people worry about the status of their home if they are filing for bankruptcy protection. People want to know if they can keep their home even though they are filing for bankruptcy.
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The answer to this question depends mainly on the type of bankruptcy you are filing. In the case of Chapter 13 bankruptcy, provided that you continue to pay the mortgage, you will be granted ownership of your home and will not lose it to bankruptcy. If you elect to file Chapter 7 bankruptcy, the determination if you can keep your home is a little trickier. As a general rule of thumb, if you can afford to pay the monthly mortgage, and the equity you have in the home is exempt, then Chapter 7 bankruptcy should allow you to keep your home.
When should I give up my home?
If the market value of your home is significantly less than the total liability that you have on the home, you should consider walking away from the house during your bankruptcy process. This is the perfect chance for you to walk away from this huge liability if your house is “under the water”. Please note that this option is not everyone because you might still have to find an alternate place to live.
Is short sale a better alternative than bankruptcy?
A short sale of your house is by definition selling your house for less than what the total mortgage (primary/secondary mortgage, line of equity) is worth. For example the total mortgage on the house is $400K and the current market price is much less than the $400K. In this case, you as the debtor will submit a request to the lender(s) for a short sale approval. If all the lender(s) approve a sale of $350K, then the $50K difference is absorbed by the lenders and booked on their records as a loss.
Should I try to convince the lender to approve a short sale instead of declaring bankruptcy?
Short sale has the advantage that you do not need to seek for bankruptcy protection. If the mortgage lenders agree to a lower payment of the debt, at the closing of the sale of your home, you will walk away from the home without any infraction to your credit history. This is the positive aspect of the short sale of your home. There is a negative side to the short sale of a home. When the lenders book a loss on their books, they will in turn issue a 1099 to you. A 1099 form is the IRS form for supplementary income. In the previous example of the home that was sold for $350K and the lender took a loss of $50K, this lender will issue the mortgagee a 1099 of $50K. What this means is that at the end of the year, from the IRS standpoint, you effectively had an additional income of $50K which you will need to pay tax on. As you can see, short sale gives you the ability to walk away from the property without having an infraction on your credit, with the disadvantage of having to pay for the taxes eventually. Whereas through bankruptcy, you will be able to walk away from the property, granted that your credit will be ruined for the next 10 years.
