What to do about a home, whether it's already in, or about to go into Foreclosure, and what to do about a home that suddenly is worth a lot less than it was a few years ago, leaving the homeowner owing more on it than its worth, are issues that I confront everyday. As a Bankruptcy Attorney with nearly 20 years experience, I have watched this recent downward shift in the stability of Michigan's economy coupled with plummeting property values drive up the number of Bankruptcy filings.

Remember, in the first part of this article, we observed that when Homeowners seek information about Bankruptcy, they can pretty neatly be divided into three categories:

1. Those dead-set on keeping their home,

2. Those wondering what to do about it, and

3. Those who are ready to bail out.

In that first article, we looked at that first group, those dead-set on keeping their homes. In this second part of our discussion about saving or giving up a home, we will examine the options for that second group, those who don't know what to do. As I noted in and about that first article, these discussions will each result in a longer-than-average Blog post, but there are no quick answers to these important questions.

Also, as we observed in that first Blog post, this whole notion of saving or giving up a home really boils down to two questions:

1. Is keeping the home financially feasible? And, if so,

2. Is keeping the home financially advisable?

When a person is considering the "save it or give it up" question, the first thing I want to know is whether they have enough money to make their house payment. Let's face it, everything else aside, if a person has a $1700 house note and they lost their job, and only has unemployment to live on (and that doesn't last forever), there may be no way to juggle the bills in order for them to make that payment. In cases where there is clearly not enough income to pay for the home any longer, keeping it is out of the question. Thus, there is no need to look at question #2.

What about someone who can, but just barely, make the house payment? Well, the considerations they have are really not much different from someone who can make the house payment without much trouble. For either of those groups, the question is whether or not keeping the home is financially advisable.

This inquiry begins by asking, how much is the home worth? By that, I mean how much would it sell for, not how much does a person have tied up into it, or would they want for it in a better economy, or how much they need or want to get out of any sale. It's disheartening, but it's also easy to get a good, rough idea of a home's value by visiting Zillow.com.

Let's look at an example: Our Homeowners are John and Mary. They bought their home in the Metro-Detroit area about 8 years ago, and they thought they got a good deal on it when they paid $180,000. They put 10% down, and now, 8 years later, they owe about $155,000 on it. A couple of years after they bought it, they could have sold it for $190,000, but now, they'd be lucky to get $145,000 for it. They are what we call "upside down, meaning that they owe more on the home than it's worth.

Let's also assume that they can still make their $1450 house note each month. For purposes of our discussion, it doesn't matter whether they can just barely make it, or if making the payment isn't too much of a struggle. The point is, each month they have to fork out $1450 for a home that is upside down and has about $10,000 in negative equity. Should they keep the home?

Before we answer that, let's consider another fact. John and Mary also have some other debt, including some credit cards. Even though they can make the house note, it's hard to pay much more than the minimums on those cards, and they realize they're essentially on a treadmill of debt; they're not getting ahead. They learn that they qualify for Chapter 7 Bankruptcy, which will wipe out all that debt, and now they have to decide whether to "put the home into" the Bankruptcy, meaning give it up, or "keep it out" of the Bankruptcy, meaning that they agree to remain liable for the Mortgage and to continue making their payments..

They love their home, and they're quite happy with the school district. They hate the thought of becoming Renters again after being Homeowners. Nevertheless, they also learn that homes on their block, not very different form theirs, are renting for about $1200, which is $250 less than they're currently paying. That same $1450 they spend on their house note would allow them to rent in an even nicer neighborhood, perhaps with a better school for their kids, or they could stay in their same general area and save $250 each month.

They realize that it will be a long time before the value of their home ever catches up with what they owe on it. It's not like the value will go up at all next year, much less up by $10,000. Lots of homes in the neighborhood have been for sale practically forever. If anything, the value might continue to go down.

Back to our question; should they keep the home?

Emotionally, they might want to, but as a purely financial decision, keeping the home makes no sense. In fact, it makes bad financial sense. Of course, through Bankruptcy they could get out from under this anchor of a house whose value might never, or at least any time reasonably soon, catch up with what's owed on it. They could pay out the same money each month for housing and literally move up in the quality of neighborhood in which they live. After all, in 10 years, even if the home's value rises to match what's owed on it, all they paid in the meantime was nothing more than rent. That money certainly didn't buy them any equity. Why not "rent" in a better neighborhood?

The better choice, I'd say, is to bail out on the house and rent in or around their current neighborhood. If they save $250 each month (the difference between the rental payment of $1200 and the house note of $1450) for a home in the same, or a similar neighborhood, and they put that money away, in just 6 years they will have put away $18,000 for a down payment on a new home, probably one in a better neighborhood.

Under the new rules regulating Mortgages, a Bankruptcy negatively affects a Mortgage Applicant for just 3 years. John and Mary, whatever else their financial abilities, won't have to worry about the Bankruptcy holding them back. Getting a Mortgage after Bankruptcy is not that hard; the harder thing, at least for a while, is getting the best interest rate available.

Even if they only put away half of what they save, in 7 years, probably long before the value of the home they gave up rises enough to even match what they owed on it, they will have saved over $10,000 for a down payment.

Now, apply those same facts to someone who can just barely scratch up enough money each month to pay the note. Even though they will probably not be putting any money away, they still will be able to use that extra $250 to help make ends meet.

Let's say John and Mary own a home which is worth about the same thing as they owe on it. What should they do?

Here we need to look more closely at what they can afford. If they can manage the house note, and even if they need to do a little belt-tightening to do it, then they should seriously consider staying put. After all, they're not "upside down" on the home. Even though they could save a little money by renting down the block, they get some tax credit for the interest they pay on their mortgage, so there's not that much to be saved by bailing out.

If, however, they can just barely scratch up enough each month to make the note, and, in truth, any extra money in their pockets would be put to good use, then I think they should seriously consider giving the home back to the Mortgage Company in Bankruptcy. This may be their one good chance to get out from under a debt they would otherwise be stuck with.

So, we come back to where we began. Our analysis here, just like in the first article, depends on how we answer these two, all-important questions: Is keeping the home financially feasible, and, if so, is it financially advisable? The job of any Bankruptcy Attorney is to help the Client arrive at an honest answer to those questions. Sometimes, the answer isn't obvious right away. Sometimes, no one answer is that much better (or worse) than another, but, at least in my office, we'll do whatever is necessary to help the Client arrive at the decision that is best for them.