Is Keeping Your House Really Best for You When Filing Bankruptcy?
One of the most common questions I get from clients is if they can file bankruptcy and keep their houses. Because most people are very attached to their homes, it can be very difficult to make an objective decision. Chapter 13 bankruptcy allows debtors to reorganize debt and catch up on mortgage arrears. However, sometimes, the best decision is actually to lose your home in a Chapter 7 bankruptcy so you can get a new, debt-free start. Some of the things I look at when evaluating your financial situation and deciding if you should keep your house in a Georgia bankruptcy filing are:
- Does your house have any equity? Equity is not an absolute requirement to keeping or losing a house. However, if you’re behind on your mortgage and your house is underwater, meaning you owe more money on it than it’s worth, giving up your house may make more sense. Now, if you are current on your mortgage payments and file a Chapter 7, then keeping your house is a more logical choice, even if it is underwater. On the other hand, if you have too much equity to protect the house, you may have to look at Chapter 13 to avoid liquidation of your house.
- What percentage of your budget does your mortgage cost? Two huge factors I look at when evaluating a person’s financial situation for a potential bankruptcy filing are income and budget. A lot of times, the problem is simple. Some people do not make enough money to sustain payment of their mortgage. A good rule of thumb is if living in your house costs more than 25% to 33% of your take home pay, including first and second mortgages, property taxes, insurance, and homeowners association fees, than you may not be able to afford your house. If you are looking to file a Chapter 13 bankruptcy to catch up on mortgage arrears, then you will have to make the monthly house payments AND the catch up payment under the Chapter 13 case.
- How far behind are you on your mortgage? If you are significantly (more than 6 months) behind on your mortgage and your financial circumstances have not changed since you started falling behind, then you probably cannot afford your house.
- Can you strip your second mortgage lien? Georgia bankruptcy courts allow the “stripping” of second mortgage liens, where debtors can show that their houses are so under water that the sale of the house would not generate enough money to pay anything toward the second mortgage. If you can strip your 2nd mortgage and it makes your house more affordable, keeping the house may be a good option.
- Can you catch up on your mortgage arrears? If you’re significantly behind on your mortgage and cannot catch up on it, Chapter 7 bankruptcy is probably not the appropriate filing. Chapter 13 may be better because it allows you to catch up on mortgage arrears by breaking payments up into monthly installments.
- Do you have any other home-related costs that are not included in your mortgage, such as property taxes and insurance? You cannot just look at the monthly mortgage payment to determine if you can afford your house. Some folks have mortgages that do not include property taxes or insurance in escrow. If the combination of all these costs exceed 1/3 of your take home pay, you probably cannot afford your house.
- Are you financial circumstances going to change? Sometimes, a temporary job loss, a divorce, or an illness can cause you to fall behind on your mortgage. If you have overcome your temporary financial set back and can afford the house, then keeping it makes more sense. You may be able to file a Chapter 13 bankruptcy and play catch up.
This list is not exhaustive for determining whether you should keep your house in bankruptcy. However, when you are facing the fear of losing your home, you may want to take a step back and think if it really is worth trying to keep your house when you cannot afford it. Sometimes, the best decision is really to walk away from the home and accept that there are things you just cannot change. And, that’s okay.
If you are thinking about filing bankruptcy in Georgia to save your home, call 404.585.0040 for a complimentary consultation with a bankruptcy attorney.