January 3rd, 2011 11:10 AM by Lehel S.
I see the ads on television and I hear them on the radio; "Stop the foreclosure of your home NOW."
It seams that lawyers have gotten into the real estate business after the Department of Real Estate cracked down on the outright solicitation of loan modifications. I actually get solicitations from other Realtors giving seminars on how a bankruptcy will save their home.
These Realtors are usually working in conjunction with lawyers. Don't get me wrong, there is nothing wrong with this relationship. However, the homeowner should be aware that a bankruptcy is not a magic bullet that will solve everything.
A bankruptcy is a federal court process designed to help people eliminate their debts or repay them under the protection of the bankruptcy court. A bankruptcy can generally be described as a "liquidation" or "reorganization."
In local real estate circles, the word on the street I hear is that agents are telling their clients that a bankruptcy will remove the second loan on the home. That is not entirely true. In order for the second loan on a home to be removed, the value of the home cannot exceed the balance of the first home loan.
For example, if you have a first trust deed for $350,000 and a second mortgage on the home for $150,000, your home's value needs to be equal to, or less than what is owed on the first.
In this example, if your home appraises for $350,000 or less, then a bankruptcy court may dismiss the second of $150,000 if you can show that you can pay the first without being totally insolvent.
Upon filing a bankruptcy, an "automatic stay" goes into effect. The automatic stay prohibits most creditors from taking any action to collect the debts you owe them unless the bankruptcy court lifts the stay and lets the creditor proceed with collections.
Here is where a homeowner needs to stay abreast of their financial situation. Sometimes a creditor can get around the automatic stay by asking the bankruptcy court to remove ("lift") the stay, if it is not serving its intended purpose.
For example, say you file for bankruptcy the day before your house is to be sold in foreclosure. You have no equity in the house, you can't pay your mortgage arrears, and you have no way of keeping the property. The foreclosing creditor is apt to run to court soon after you file for bankruptcy, to ask for permission to proceed with the foreclosure - and that permission is likely to be granted.
Although lenders do not want to foreclose if it can be avoided, they do want to make sure you can follow through on any promises you make to bring your account current.
Whether you can qualify for a Chapter 7 or a Chapter 13 is up to the criteria set forth by the bankruptcy court. The best advice a person in this situation can get is to be entirely honest with the Realtor or lawyer they are working with and honest with themselves.
The sooner a homeowner comes to terms with his/her financial situation, the sooner they can make choices affecting their future. There is often a common fear that if you have a foreclosure or bankruptcy on your record that you will not be able to buy a home again in the future. There is no denying the fact that your next purchase may be difficult, it does not mean that it is impossible.
Understanding a few basics can help you to achieve the goal of home ownership again, even if you have gone through foreclosure.