As a Detroit and Tri-County area Bankruptcy Attorney, questions about saving or giving up a home are part of my everyday conversations. Typically, the people that call my office fall into 1 of 3 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.

Given the current state of Michigan's economy, and because we have been hit so hard with falling property values, this is a topic that deserves some consideration and examination.

So what does a person do when confronted with Foreclosure? What about those who aren't in, or even near foreclosure, but who are having a hard time keeping up on their home payments? What about those who feel like they're paying way too much for a home whose value is below what's owed on it?

If we examine, within the context of Bankruptcy, each of the three typical kinds of callers mentioned above, we can at least learn a little about some options for each. This first segment will focus on the first category, and in each of the next two Blog posts we'll examine, in turn, those in the 2nd and 3rd groups. Because this is such an important topic, this Blog post, and I expect the two that follow, will be long. There are no quick answers when talking about keeping or giving up your home.

Often, a call comes into my office from a person (sometimes married, sometimes not), who is stressed out over having too many bills. The caller realizes that they either have less income coming in than expenses going out, or they're just barely able to make the minimum payments on their bills. If they're not already behind, they know that they'll be stuck in debt forever, just making minimum payments, and having no money left over to do anything worthwhile. They're sick of being "in the hole" and they want to dump their debt. They are worried, however, about losing their home. Their home is the most important thing they have.

I'm a homeowner. I understand the emotional investment many people make, besides the financial, in their homes. Things like the School District, if you like it, or the neighbors, or whatever, make the thought of walking away from the home very unpleasant. This type of caller wants to save their home at all costs.

The first thing I try and do is help the caller detach themselves from the emotional considerations regarding that house. Emotional considerations are impediments to good business decisions. Your home is, after all, just a house; it's a building, not a person. I explain that if they were sitting down with a good CPA or Financial Planner, he or she would never let emotions enter into the "business" of home ownership, or any other business considerations. These are cold, hard numbers we're talking about, not warm and fuzzy bunny rabbits. And make no mistake, family finances are not only business; they're your business, and perhaps your only business.

I ask them to assume, for the moment, that they're describing their home and financial situation to that CPA or Financial Planner. That person is only looking at the black and white, dollars and cents considerations of the home. Two questions then arise:

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

2. Is keeping the home financially advisable?

I remind them that this analysis is limited to the financial considerations, not those that are emotional.

If the answer to the first question ("can you afford this house?") is "no," then there's no need to even consider the second. To answer that question, a person needs to consider what other expenses they will have. If you live a few blocks away from work, and you have no kids that need to be driven around, then perhaps you can live without a car, or with only 1 car in the family. Are you leaving enough money in your budget for food? Is there enough to cover utilities, clothes, medical and dental care, car insurance, and other expenses that cannot be avoided. As a guide, I have linked to the actual Bankruptcy Expense Sheet used by all of the Bankruptcy Courts in the U.S.

If a person has net income of $2500 per month, and the house payment is $1600, and the car payment is $300, with $100 going to cover insurance and another $100 for gas, that only leaves $400 left over for food, utilities, clothing, medical and dental, and whatever other expenses they have. What about cable TV or internet? Where is the money for any car repair or other emergency that will inevitably arise? What about haircuts, and Christmas presents?

Sometimes, after sitting down in my office and looking at these numbers in black and white, a person can truly see, for the first time, what they're dealing with. For some, the math works out, and there's enough income to keep the home. With a little belt-tightening, they can make the house payment.

Things are, of course, different if the home is already in foreclosure. There are past-due payments that need to be made up. Where's the money for that? For those that make more than enough to make their home payment (and any arrearages), cover their other living expenses and enter into a debt re-payment plan for their other debt, Bankruptcy offers relief in a Chapter 13 plan. This requires re-payment of at least 25% of a person's unsecured debt over a period of 3 to 5 years. My office does not handle Chapter 13 Bankruptcy cases, but, if we determine that it's the only, or even a good option for a person, we'll advise them of that and even make a referral.

Most of the callers I hear from are miles away from drawing up some payment plan, however. They have too much debt, and not enough income. They want to get completely out of debt, and that's done by filing a Chapter 7 Bankruptcy.

So, if we've run the numbers, and it appears that that there's not enough income to keep the house, then there's no need to consider whether or not it's a good idea. People in that situation have to determine whether they can sell the house and get out of it, or whether they want a quick, clean break and will just surrender, or "give up" the home through Bankruptcy. Giving the home up in Chapter 7 Bankruptcy allows a person to avoid Foreclosure and to walk away owing nothing. This is what many of my clients do. The worst thing a person can do is to just sit and wait for something to happen. Pretty much every expert with a grain of honesty in them has pointed out that before things get out of hand, a person should call their lender and see if there's some way to save the home. The State of Michigan, HUD, and the State Bar of Michigan each have a good website with loads of helpful information. If there's no workable solution, then a person is left with the 3 choices we've been discussing: Sell it, lose it, or walk away from it in Bankruptcy.

Even if a person is already in Foreclosure, or even if the home is gone and the Foreclosure process is over, Bankruptcy allows a person to walk away from any debt that could or did result, even if the house hasn't yet sold.

However, if it looks like, after dumping their other debt, a person can afford their home, we go on to the second question; is it financially advisable to do so? This is more a question of Financial Planning than anything else. If the value of a person's home has fallen to the point where they owe a lot more for it than what it's worth, then the question becomes how good an idea is it to keep paying more for this home, when we could rent a nicer one for the same amount? This is particularly true in those situations where, after a few years, the home will still be worth less than what's owed. There will be no equity (perhaps even "negative equity') in the home. What's the benefit of throwing that money away? Maybe it's time to consider renting a similar home in a similar neighborhood for less money than the mortgage payment on an "upside down" (more is owed on the home than what its worth) home, and saving that extra money for a down payment on a new home in a few years.

If they don't owe (much) more that the home is worth, and they can handle the payment, then keeping the house may well be the best choice, even if the value won't be rocketing up anytime soon. A person in this situation can still get rid of their other debt through Bankruptcy, while keeping their home.

The point here is that there are lots of considerations, but they can be prioritized by asking the two questions we have been discussing: Is it financially feasible to keep the home? If so, is it financially advisable to keep it?

The sad truth is that some people are unable to look at their situation objectively, and will either do nothing, or keep doing financially inadvisable things to stay in their home. In the long run, unless some high-paying job or winning lottery ticket finds its way into their life, those individuals are only putting off the inevitable, and making things worse in the meantime.

Other times, after looking at the numbers, people see where they can make some lifestyle changes, and that it's possible to keep their home. As a Bankruptcy Attorney whose goal it is to help people (after all, I make no more and no less whether someone keeps their home or not), my hope is that they make the right decision, one that will have a beneficial impact on their lives and finances. Most of the other Bankruptcy Attorneys I know, myself included, want, more than anything else, to help people make the best choices.

Before those choices can become clear, however, a person must take an honest, unemotional look at their situation. And that means that even if a person is dead-set on keeping their home, they first have to open themselves up to an honest analysis of their financial situation before they can make the "right" decision, whatever that may be.