While some consumers have been able to avoid foreclosure through loan modification, others complain that lenders often “lose” paperwork and then deny their modification because “the application was incomplete” or the loan modification process takes so long that the mortgage company starts foreclosure proceedings at the same time.
In Illinois and Missouri the homestead exemption is $15,000. This is the amount you can protect from creditors. In addition to the homestead exemption you add all mortgages and liens together. That amount is often more than the value of the house. In most cases, there is no non-exempt property that has to be paid to creditors. In a chapter 7, the bankruptcy voids the mortgage contract and allows you to reaffirm the contract with your mortgage company. In approximately half of the bankruptcy cases, the mortgage company does not send out a reaffirmation agreement on their own. If you wish to reaffirm your mortgage, contact your mortgage company and request a reaffirmation agreement. A chapter 13 does not modify the original contract but allows you to pay any late payments over 4 years in Missouri (St. Louis area), and over 5 years in Illinois (East St. Louis area).
Should you reaffirm the mortgage debt or surrender your home? The best answer depends on your unique circumstances. There are significant advantages and disadvantages for both options.
Will you be able to continue making your mortgage payment on a timely basis after the bankruptcy? If so, reaffirmation can be a powerful tool to help your re-establish your credit. Credit scores weigh heavily in favor of timely mortgage payments. If you have children, reaffirmation will be less disruptive to their lives than moving to a different house in a different neighborhood. Reaffirmation may be more cost-effective in the long run as well. For most debtors, it is impossible to secure a new mortgage immediately after foreclosure of an existing mortgage. The only option may be renting a home. Rent on quality homes often increases with each lease renewal, and could advance above your current house payment in a few short years.
Do you have enough equity in the home to reaffirm?
For many people, foreclosure is a better financial option than reaffirmation. The collapse of the housing bubble has left many homeowners upside-down on their mortgages. (The balance owed on the loan is significantly higher than the home’s value.) For debtors whose homes have been foreclosed, there may still be ongoing financial challenges in the form of a deficiency judgment. When the home has been sold (in foreclosure or by short sale), the lender then sues the homeowner for the difference between what the lender received for the home and the loan balance. In many cases, this can be thousands of dollars. By surrendering the home in bankruptcy, though, debtors can avoid the deficiency judgment.
Debtors also have the option to keep the house and don’t reaffirm. This has the advantage of being able to “surrender” the house at a later time and not being liable for any deficiency. In other words, you can continue to make payments towards your mortgage, and if something happens at a later time, for example an illness or loss of your job that makes it impossible to continue making payments towards your mortgage, you can still walk away and don’t need to worry about being sued for a deficiency.
The bankruptcy filing will stop the foreclosure immediately and the automatic stay can give you more to work out a loan modification or go through with the bankruptcy and pay off the arrearage during the case. If you intend to surrender your home, a few months’ delay in foreclosure proceedings can give you time to find another home and move under less pressure and protects you from any lawsuits for a deficiency.
Notice of a pending bankruptcy may motivate the lender to approve modification of the loan to encourage you to reaffirm the debt, especially if you had a good payment record in the past.
If you are facing foreclosure, your bankruptcy attorney can review your options with you and help you decide on your best course of action.