If you’re facing a foreclosure sale, filing for bankruptcy protection can at the very least postpone the sale, and in a chapter 13 it can make it possible to save the house. 

In the October 12, 2011 Los Angeles Times, Alejandro Lazo reported on the latest surge in foreclosures – especially in California.  This fits what I’ve been saying for some time now about missed mortgage payments and the mortgage nightmare.  Here’s a little of what Mr. Lazo wrote:

The number of homes entering the foreclosure process surged 19% in the third quarter compared with the previous quarter in states where foreclosures take place largely outside of the courtroom, according to RealtyTrac, an Irvine information firm. These nonjudicial states include California, Nevada, Arizona, Oregon and Washington. . . . Analysts expect foreclosures to pick up in coming months. 

What about your home?  Won’t it start to increase in value?  Here’s what MoneyNews had to say about that on October 7, 2011

Robbed of $69,750.  That’s how much the average American lost in the value of their home as median prices plunged 31 percent in the last five years.  And it’s about to get much worse, according to New York Times best-selling author and economist Robert Wiedemer.  “Consider that mortgage rates are at an all-time low right now,” he explains. “But if mortgage rates rise and hit a reasonable 7.5 percent, it’d basically mean home prices would have to decrease by as much as another 32 percent.”  . . . Consider these disturbing economic trends:

  • There are 18.4 million vacant homes saturating the market.
  • The unemployment rate is currently at 9.1%. However, the amount of people who are underemployed, which includes those who are involuntarily working part-time, is at 18.4%.
  • 28% of home owners have a loan for more than what their house is worth.

“I wish I was wrong,” Wiedemer said when asked how he accurately predicted the real estate crash in 2006. “And there is mounting evidence that it will undoubtedly get worse. . . .”

What’s a homeowner to do?  The answer depends, of course, on the facts of your particular case.  Suppose, however, that you’re one of the millions of homeowners who are underwater by a good-sized chunk of change.  And suppose you’re behind on your mortgage payments.  

If, on the one hand, you have looked the beast in the eye and concluded that you aren’t going to own one molecule of the house for many years – at least until you’re no longer underwater – and you see the futility of trying to keep the house, why not file for chapter 7 bankruptcy and walk away?  You’ll get rid of the personal liability, and you won’t have the cancellation of debt tax hit .  And if the foreclosure bells are ringing in your ears, you’ll at least postpone the sale and buy some time to make alternate housing arrangements. 

On the other hand, if things have recently changed and you can now afford to make the mortgage payments, consider a chapter 13 bankruptcy.  You can take up to five years to pay back the mortgage arrearage.  And if you’re sufficiently underwater so that the current value of the house is less than the current balance on the first mortgage, you can strip off the second mortgage and treat it like credit card debt.  This means that at the end of the chapter 13 plan, the second mortgage will cease to exist, even though you may have paid chump change on it through the plan. 

Unfortunately, stripping off a second mortgage is not available in chapter 7, but it is available in a chapter 11 or chapter 13 bankruptcy.  I’ll devote a post to the details of a second mortgage lien strip sometime in the next couple of days. 

For now, find out how to resolve the foreclosure issue by consulting with a high-quality attorney.